Analysis: China’s bond market opening offers no panacea for debt-laden African states By Reuters

By Duncan Miriri and Samuel Shen

NAIROBI/SHANGHAI (Reuters) – Plans by African governments to raise money in China’s domestic debt markets through so-called panda bonds could be undone because of their heavy debts and greater lack of market infrastructure, investors said and the analysts.

African governments seeking to tap new funds have sold bonds in currencies other than their own, mostly US dollars and sometimes euros, for three decades.

But gaining a foothold in the world’s second-largest bond market has proved elusive. Changing this is high on the agenda for both Beijing and cash-starved African governments.

At a China Africa summit in Beijing this month, President Xi Jinping said he wanted to “encourage and support Africa in issuing panda bonds in China”.

But there are some very basic obstacles to issuing in mainland China for African issuers.

“They are not freely traded around the world, which makes these bonds less attractive,” said Lynda Iroulo, an assistant professor at Georgetown University in Qatar.

Panda bonds are a growing market. Issuances in the first three quarters of 2023 rose to $18 billion, data from the National Association of Institutional Financial Market Investors showed, surpassing $11 billion for all of 2022.

The push followed Beijing relaxing rules early last year to make it easier to issue. One big change is that issuers can choose to spend the proceeds in China or repatriate them.

Lower interest rates make China an attractive market compared to the United States, with 3-year bonds offering a spread of 150 basis points.

“We expect onshore funding costs to remain cheaper even with the US interest rate cuts, as China’s central bank may have more flexibility to cut interest rates,” said Christopher Lee, S&P’s Asia analyst director. Pacific.

COMMERCIAL CONNECTIONS

African states seeking closer trade ties with China could tap into the market, said Jack Buffington, a professor at the University of Denver in the United States.

“Most African nations that have potential for growth in manufacturing and supply chain are interested in having a balance in both the US and Chinese spheres of influence,” he said.

The Panda bond issue could add a new thread to the financial ties between China, which is Africa’s biggest bilateral creditor.

Kenya, whose President William Ruto called on China at the summit to reprofile Africa’s debt to include longer grace periods and longer loan mandates to ease its debt burden, is a potential panda issuer.

The East African nation wants to issue a $500 million debut bond for pandas this financial year, Bloomberg reported in March.

Kenya joined the Asian Infrastructure Investment Bank (AIIB) this month, a prerequisite for issuing pandas.

“Accession will enable Kenya to access concessional funds,” Ruto said.

The AIIB provided guarantees for Egypt’s issuance of RMB 3.5 billion sustainable panda bonds last year, the first in Africa. The bank did not respond to a request for comment.

Its website showed that other African nations such as South Africa and Ghana have joined it in recent years, while others such as Tanzania and Senegal are waiting to join.

LIQUIDITY

The dominance of the dollar could also slow an African pivot to China’s domestic bond markets.

Although the greenback’s share as a global reserve currency has fallen to 59% from 70% over the past decade, it continues to dominate global trade and financial markets.

A switch to Chinese currency funding for frontier issuers would require “a major transformation of the currency and the financial system,” said University of Denver’s Buffington.

For managers of government debt, liquidity concerns – which in turn could raise the premium demanded by investors to hold such less frequently issued bonds – also pose problems.

“It’s better, at least in the short term, to focus in the dollar which is quite liquid,” said Otavio Medeiros, Brazil’s public debt undersecretary, when asked if Brazil would consider issuing a Panda bond.

Others are less concerned. Hungary, which has close political and trade ties with China, has been issuing panda bonds since 2017.

But Hungary’s multiple issue has not resolved questions about how these bond deals are settled and their liquidity, said Sergey Dergachev, portfolio manager at Union Investments.

“It is very difficult (for) me now to imagine many corporate and sovereign issuers in emerging markets actively issuing in renminbi,” he said.

However, African countries should continue their efforts to issue panda bonds, said Banji Fehintola, chief executive at Africa Finance Corporation (AFC), a continental development financier, by recruiting partners to smooth the way.

He cited the example of Egypt, which last year issued a $500 million Japanese samurai bond with the help of the AFC, a deal that demonstrated Africa can successfully tap into new markets.

“If we’re all traditionally going west to raise capital all the time without looking for alternative sources of funding, that’s not the right strategy,” he said.