China’s “World Bank” backs its renminbi bond wave

The Asian Infrastructure Investment Bank, Beijing’s answer to the World Bank, is lending its support to what it believes will be a wave of renminbi bonds issued by developing countries seeking to attract Chinese investors.

Jin Liqun, chairman of the world’s second largest development bank by members, told the Financial Times that he had seen “high demand” for local currency loans and that a number of countries had asked him for help selling them -so-called panda bonds. .

Last year, Egypt used a bank guarantee, covering principal and interest, to issue in the Chinese mainland market. Jin said the bank plans to provide additional guarantees or advice on such loans as it seeks to boost the development of this nascent market and encourage financing for high-quality projects in developing countries.

“Some members have asked about the experience of panda bonds issued by the Egyptian government and would like to do so,” Jin said. “We respond to the needs of these countries.”

The AIIB’s support for the panda bond market comes as China continues its long-standing efforts to increase international use of the renminbi and reduce reliance on the US dollar.

Beijing announced new rules in 2022 for the issuance of currency debt by foreign entities, allowing money raised domestically in China to be used offshore. Panda bond sales so far this year are already on track to surpass last year’s total of 150 billion Rmb ($21 billion) 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 struggles to avoid deflation, are also helping to draw countries into the panda bond market.

However, so far relatively few foreign governments have chosen to use this less conventional form of borrowing. Concerns include a lack of buyers compared to the huge global investor base for US dollar-denominated bonds and the fact that the renminbi is still a much less tradable currency than the greenback.

Christopher Lee, head of Asia Pacific analysis at S&P Global Ratings, said “very low” domestic interest rates were a “big incentive” for borrowers and also pointed to the attractiveness of guarantees from the AIIB. But he added that few foreign governments have so far entered the panda bond market because issuers have yet to agree with regulators on how much of the money raised can 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 at its annual meetings in Uzbekistan last week and has a triple-A credit rating, making the multilateral lender a powerful force to connect countries to a debt market that China wants to deepen it. Its members include Great Britain, France and Germany.

Egypt became the first African country to issue renminbi debt in China’s onshore market last October when it sold Rmb3.5 billion in three-year bonds under guarantees from the AIIB and the African Development Bank.

The debt carried a 3.5 percent coupon, compared to the prohibitive costs of borrowing in US dollars at the time, as Egypt faced a debt and currency crisis before the devaluation and IMF bailout this year.

“Few Chinese investors knew about the Egyptian bond issue. So without our guarantee, it would be very, very difficult,” Jin said. “Even if it increased (the cost) by a few basis points compared to direct borrowing from us, Egypt could establish itself in the Chinese panda bond market.”

Chinese President Xi Jinping urged several African states in particular to issue panda bonds at a summit in Beijing with leaders from the continent last month as part of the Chinese leader’s efforts to promote the international use of the renminbi.

Kenya, which joined the AIIB last month, said earlier this year it was interested in selling panda bonds. Pakistan has also looked into debt issuance.

Both countries are struggling to contain the cost of new borrowing after receiving an IMF bailout this year. Both have been under pressure from debts they have built up with Chinese lenders and private lenders in recent years.

New loans under China’s Belt and Road Initiative to build infrastructure projects in the developing world have slowed to a trickle after a series of defaults and debt crises rocked Beijing’s policy banks.

China controls 27% of voting rights at the AIIB, compared to less than 6% at the World Bank. While a number of Western countries have signed up to the AIIB, the US, which holds about 16 percent of the World Bank’s votes, has not.

Jin, a former Chinese vice finance minister who has led the AIIB since its inception in 2016, said the bank is focusing on “high-quality” projects because many borrowers are facing heavy debt.

“The big issue is how can we help these countries attract foreign capital flows without creating debt problems? Our answer is that we must push for productive investment,” Jin said.

“You may have also noticed that China, in terms of the Belt and Road . . . they focused on quality rather than quantity and I think you can see that they are learning from their experience as well,” he added. “As far as we’re concerned, we just want to make sure that whatever funding we provide will have the best outcome.”