What are Panda bonds that Pakistan is banking on to raise money?

Cash-strapped Pakistan, which for months has been heavily dependent on loans from the International Monetary Fund (IMF) to keep its economy running, is now experimenting with a new bond scheme. Pakistan has said it has been working to issue Chinese currency yuan-denominated Panda bonds this year to shore up its finances.

Pakistan plans to raise $250mn from Chinese investors

Through the Panda bonds, Pakistan aims to raise $200 to $250 million from Chinese investors over the next six to nine months, Pakistan’s Finance Minister Muhammad Aurangzeb said in an interview with Bloomberg.

“The country is very keen to tap the Panda bonds and the Chinese capital markets. We have been remiss as a country not to tap it previously," said Aurangzeb on the sidelines of the Asian Financial Forum in Hong Kong.

He also said China International Capital Corporation has advised Pakistan on the issuance of Panda bonds.

Aurangzeb, in a separate interview with South China Morning Post (SCMP), said that it was “absolutely critical” for Pakistan to diversify its funding base.

However, the $200-$250 million that Pakistan is planning to raise from Chinese investors is slightly lower than the $300 million the Aurangzeb was targeting in March last year after being given the finance ministry portfolio.

“Since I took over [in March 2024], I have been very vocal about this – that we want to go for panda bonds, an inaugural sovereign panda bond … I’m pushing everyone, including our own teams, to see if we can get this done before June,” Aurangzeb was quoted as saying by SCMP.

But, what are Panda bonds?

Panda bonds are yuan denominated and are issued in China’s capital markets by non-Chinese entities.

The Panda bonds enables foreign issuers, including multinational corporations, international financial institutions, and sovereign governments, to access capital from Chinese investors

As per SCMP report, the gained interests of traders and countries who seek to diversify from an over-reliance on the US dollar, while tapping into the world’s second-largest economy at attractive rates.

The plan to issue Panda bonds comes after the sovereign rating of Pakistan was upgraded recently. The finance minister is hoping for further upgrades and targeting of getting into a “single-B” category, which will enable the country to return to global bond markets to raise funds.

How Pakistan issuing Panda bonds helps China

With issuance of Panda bonds, Pakistan will help further integrate its capital markets with China’s which will in turn help Beijing in its push to expand the use of the currency, Aurangzeb was quoted as saying by SCMP.

He further said that Pakistan had followed Egypt’s experience to issue the yuan bonds on the back of credit improvement from the China-led Asian Infrastructure Investment Bank (AIIB).

Last year, Egypt received guarantees from the AIIB and the African Development Bank, covering principal and interest, to issue panda bonds on the local mainland China market.

“I’ve met the president of the AIIB in Washington… with a very clear view that we will replicate what Egypt did in terms of the credit enhancement… which allows us to access the local capital markets for the panda bond,” Aurangzeb told SCMP.

Pakistan move helps internationalisation of yuan

The report mentioned Aurangzeb as saying that Pakistan would help to support the “internationalisation of the renminbi” and boost cooperation with the “second-largest and second-deepest capital market in the world”.

Pakistan still dependent on IMF bailout package

Pakistan was at the brink of default in 2023 as its economy withered amid political chaos and economic mismanagement, but it improved last year as the inflation rate dropped from nearly 38 per cent in May 2023 to 4.1 per cent in December 2024.

Aurangzeb, as per SCMP report, said Pakistan was in trouble because the economy had been “primarily import-led”, which caused the country to “run out of foreign currency and get into a balance of payment problem”.

“Which means we have to fundamentally change the DNA of the economy towards export-led growth,” he said.

The Pakistan government is now optimistic that it will be able to meet the terms for an ongoing IMF $7 billion loan.

Next month, an IMF delegation is scheduled to visit Pakistan. The agency wants Pakistan to broaden its tax base and reach a tax-to-GDP ratio of 13.5 per cent, from 10 per cent in December, Aurangzeb was quoted as saying by Bloomberg.

With inputs from agencies.