Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Asian Infrastructure Investment Bank, Beijing’s answer to the World Bank, is giving its backing to what it believes will be a wave of renminbi bonds issued by developing nations wanting to tap Chinese investors.
Jin Liqun, president of the world’s second-biggest development bank by members, told the Financial Times he had seen “great demand” for local currency borrowing and that a number of countries had asked for help on how to sell so-called panda bonds.
Last year, Egypt used a guarantee from the bank, covering principal and interest, to issue on the mainland Chinese market. Jin said the bank planned to offer further guarantees or advice on such lending as it tried to foster the development of this nascent market and encourage funding for high-quality projects in developing nations.
“Some members have inquired about the experience of panda bonds issued by the Egyptian government, and they would like to do this,” said Jin. “We are responding to the needs of these countries.”
The AIIB’s support for the panda bonds market comes as China continues its long-running push to increase international use of the renminbi and reduce reliance on the US dollar.
Beijing announced new rules in 2022 for debt issuance in the currency by foreign entities, allowing money raised domestically in China to be used offshore. Panda bond sales this year are already on course to surpass last year’s total of Rmb150bn ($21bn), as issuers including western banks and carmakers take advantage of Beijing’s reforms.
China’s cuts to domestic interest rates, as the world’s second-largest economy battles to stave off deflation, are also helping attract countries to the panda bond market.
However, relatively few foreign governments have chosen to use this less conventional form of borrowing. Concerns include a lack of buyers compared with the huge global investor base for bonds denominated in US dollars and the fact the renminbi is still a far less easily tradable currency than the dollar.
Christopher Lee, chief analytical officer for Asia-Pacific at S&P Global Ratings, said the “very low” domestic interest rates were “a big incentive” for borrowers and also highlighted the attractiveness of guarantees from the AIIB.
But he added that few foreign governments had come to the panda bond market because issuers still needed to agree with regulators about how much of the money raised could be taken out of China.
“Repatriation is still an issue because China wants to manage its currency,” he said.
The AIIB accepted its 110th member state at annual meetings in Uzbekistan last week and has a triple-A credit rating, making the multilateral lender a powerful force to plug countries into a debt market that China wants to deepen. Its members include the UK, France and Germany.
Egypt became the first African country to issue renminbi debt in China’s onshore market last October when it sold Rmb3.5bn in three-year bonds under guarantees from the AIIB and the African Development Bank.
The debt had a coupon of 3.5 per cent, compared with prohibitive US dollar borrowing costs at the time, as Egypt grappled with a debt and currency crisis ahead of a devaluation and IMF bailout this year.
“Few investors in China knew about the Egyptian bond issuance. So without our guarantee, it would be very, very hard,” Jin said. “Even though it would increase [the cost] by a couple of basis points, compared to direct borrowing from us, Egypt could establish itself in the Chinese panda bond market.”
Chinese President Xi Jinping urged more African states in particular to issue panda bonds at a summit in Beijing with leaders from the continent last month, as part of a drive by the Chinese leader to foster international use of the renminbi.
Kenya, which joined the AIIB last month, said this year that it was interested in selling panda bonds. Pakistan has also explored issuing the debt.
Both countries are battling to contain costs on new borrowing after receiving IMF bailouts this year. Both have been under pressure due to debts they racked up with Chinese lenders and private creditors in recent years.
New loans under China’s Belt and Road Initiative to build infrastructure projects across the developing world have slowed to a trickle after a series of defaults and debt crises rocked Beijing’s policy banks.
China controls 27 per cent of voting rights at the AIIB, against less than 6 per cent at the World Bank. While a number of western countries have signed up to the AIIB, the US, which has about 16 per cent of World Bank votes, has not.
Jin, a former Chinese vice-minister of finance who has led the AIIB since its inception in 2016, said the bank was focusing on “high-quality” projects as many borrowers grapple with high debts.
“The big issue is, how could we help these countries attract external capital inflows without creating debt problems? Our answer is we need to push for productive investment,” Jin said.
“You may also have noticed that China, with regard to Belt and Road . . . they focused on the quality rather than the quantity, and I think you can see they’re also learning from their experience,” he added. “So far as we are concerned, we just want to make sure any financing we provide will work out to the best result.”