Panda bonds roar back to life in China

The panda bond market, in which overseas institutions issue renminbi bonds in China's onshore market, posted record-high issuances by value this year and is poised to attract new issuers, including those from the Middle East and Latin America, in 2025, market mavens said.

Foreign issuers' growing interest in panda bonds reflects the rising competitiveness of the renminbi as an alternative international financing currency, bolstering the internationalization of China's currency despite uncertainties posed by the incoming US administration, they added.

The panda bond market saw 109 issuances this year worth 194.8 billion yuan ($26.7 billion) as of Friday. The issuance total, according to market tracker Wind Info, was up 26 percent year-on-year, a record high.

The growth was driven by growing participation of purely foreign issuers — or overseas issuers without affiliations with Hong Kong-based institutions.

Issuances by purely foreign issuers nearly tripled from about 27 billion yuan in 2023 to more than 75 billion yuan in 2024. Their proportion in total panda bond issuances rose from about 17 percent to almost 40 percent, said Deutsche Bank, a panda bond underwriter.

Germany has emerged as the largest issuer region outside Hong Kong, issuing about 22 billion yuan in panda bonds this year. Panda bond issuances from corporate entities in France, Singapore and Canada also rose sharply this year.

"Panda bond issuers are expected to become more diversified (in 2025)," said Samuel Fischer, head of China onshore debt capital markets at Deutsche Bank.

"In addition to an increase of issuers from developed markets, new issuers from the Middle East and Latin America are expected to enter the (panda bond) market."

Fischer attributed this trend to the growing use of the renminbi in these regions, increased cross-border economic cooperation, and the renminbi's favorable yield advantage — the average coupon rate of panda bonds issued this year dropped to 2.5 percent from 3.1 percent in 2023.

While China cut interest rates to stabilize economic growth, interest rates have stayed elevated in the United States this year following efforts to curb inflation, sending the difference between the 10-year treasury yields of the US and China as high as 283 basis points as of Monday, said Wind Info.

Ming Ming, chief economist at CITIC Securities, said that underpinning foreign issuers' growing appetites also includes China's regulatory changes in 2022 deepening financial opening-up, which allowed funds raised via panda bonds to be remitted abroad.

Pan Gongsheng, governor of the People's Bank of China, the country's central bank, said at a meeting in November with foreign financial institutions that the country will expand connectivity between domestic and international markets and promote institutional opening-up of both the financial services sector as well as financial markets.

The growing appeal of panda bonds reflects the rising role of the renminbi for international financing, a trend that is expected to continue into 2025, Fischer said, as China maintains an accommodative monetary policy while foreign enterprises continue to increase investments in China, driving renminbi financing needs.

"The renminbi financing environment remains competitive and appealing," he said, adding that Deutsche Bank itself has used up an 8-billion-yuan panda bond issuance quota in June, with plans to apply for more, "subject to regulatory approval and favorable market conditions".

The panda bond market is also expected to see both larger sizes and longer maturities of issuances, Fischer said, further strengthening the panda markets' global status as a key option for issuers.

Thanks to improved liquidity conditions, the panda bond market has seen several issuances at a size of about 5 billion yuan this year, he added, which represents a significant increase from previous years and is comparable to issuances in the Europe and US markets.