|At $48 billion, the total amount of ‘panda bonds’ is tiny compared with the overall value of China’s debt market AFP/Thibault Camus|
Italy might join the trend as well, despite EU concerns that China may be seeking a way to increase its influence on the continent.
On May 30, Portugal became the first eurozone nation to issue renminbi-denominated bonds, raising two billion renminbi (US$280 million) via a three-year instrument at a rate of 4.09 per cent.
The offer attracted strong demand, and Portugal’s junior finance minister Ricardo Mourinho Felix told the financial news website ECO that Lisbon’s goal was “to enter a large market with strong liquidity.”
Poland and Hungary have already issued bonds on the Chinese market, in 2016 and 2017-2018 respectively, and Austria and Italy – eurozone members like Portugal – have said they might do so as well.
The cost of borrowing on Chinese markets is much higher than in Europe however, so the reasons for such a move likely lie elsewhere.
Portugal, which faced problems with financing when it was bailed out by the EU and IMF in 2011-14, now can offer less than 1.0 per cent to borrow money for 10 years on European markets.
But by helping China become a bigger actor on the global financial stage, governments can get into Beijing’s good books, and attract investment in sectors like financial services, infrastructure and transportation.
The Portuguese port of Sines is interested in attracting Chinese investment as part of Beijing’s global “Belt and Road” network, for example.
“There are also key political or reputational concerns,” notes Liang Si, an Asian debt market expert at French bank BNP Paribas.
“Any kind of sovereign issuer issuing in panda bonds could be seen as a positive political gesture to further establish their ties with China, now the second biggest economy in the world.”
The bonds have existed since 2005 but they took off four years ago when the Chinese central bank decided to encourage their use as Beijing launched the “Silk Road” initiative aimed at furthering China’s economic and technical influence.
“Little by little, China is trying to open its market to investors and transform its money into a reserve currency,” said Frederic Rollin, an investment strategy advisor at Pictet AM.
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At US$48 billion, the total amount of “panda bonds” issued to date palls in comparison with the overall value of China’s debt market, which is around US$13 trillion.
“There are few foreign issuers in the yuan market,” because it is “not particularly attractive”, acknowledged Frederic Gabizon from HSBC, using another name for the renmimbi currency.
His London-based bank was one of those underwriting the Portuguese issue.
Typical operations have remained small, at between US$145 million and US$434 million for short-term issues.
That said, “China’s importance from an economic point of view is well established, and many countries therefore wish to help it develop its financial markets”, Gabizon explained.
Amid growing trade tension between China and the United States, Portugal has followed Greece and several Eastern European countries in joining the “Belt and Road” project. Italy has as well, becoming the first member of the Group of Seven (G7) industrialised nations to back the project.
Rome has also said it would consider issuing “panda bonds”, as Austria did in late April.
That has caught the attention of big EU nations like France and Germany.
“Since 2009/2010, China has begun to look for Trojan Horses” in Europe, said Christopher Dembik at Saxo Banque.
Beijing targets “countries that often have a greater need for investments and accept in exchange, and through an implicit agreement,” to support the “panda bond” market, he added.
France and Germany, which have no problem placing sovereign debt in euros, are wary of Beijing’s intentions.
It is looking for the “weak underbelly for Chinese investment in Europe and to consolidate” assets already acquired in Spain and Portugal despite reservations of other EU member states, the president of Paris-based think tank Asia Centre, Jean-Francois Di Meglio, told AFP in November.
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