Growing role of China's capital market stressed

The first sovereign panda bond issuance by Pakistan — priced at a historically low coupon rate — highlights the growing potential of China's capital market to provide diversified and lower-cost financing channels for developing economies, experts said. 

The issuance not only opened an avenue for Pakistan to secure continued access to renminbi financing, but it may set a precedent for more Belt and Road economies to lower financing costs through China's bond market at a time when energy-related inflation pressures are driving up global borrowing costs, they said.

A panda bond is an RMB-denominated debt instrument issued by overseas governments or institutions in China's onshore capital market. Pakistan issued its first sovereign panda bond on Thursday, becoming the first South Asian economy to do so.

The issuance totaled 1.75 billion yuan ($257 million), with a three-year maturity and a coupon rate of 2.5 percent. China Economic Net reported that the coupon rate was "the lowest Pakistan had achieved on a sovereign bond", which was confirmed by China International Capital Corp, or CICC, the lead underwriter and book runner for the deal.

The issuance, the proceeds of which will finance sustainable development projects in Pakistan, was oversubscribed more than fivefold and marked the first tranche under Pakistan's newly established 7.2 billion yuan panda bond program.

Pakistan's Minister for Finance and Revenue Muhammad Aurangzeb said he is confident that the program would provide his country with a strong platform for future issuances, further deepening financial connectivity and sustainable economic cooperation with China.

Liu Chunsheng, an associate professor of international economics at the Central University of Finance and Economics, said the issuance highlighted the unique role China's bond market plays in providing lower-cost financing and diversified funding channels for international issuers amid rising global inflation and elevated borrowing costs.

"With China's interest rates remaining relatively low and RMB assets increasingly showing safe-haven attributes, the panda bond's 2.5 percent coupon was far below the cost of Pakistan's US dollar bonds, which could reach roughly 7 to 8 percent under some circumstances," Liu said.

Despite Pakistan's long-term sovereign credit rating being in the speculative-grade category at B- by S&P Global Ratings, the bond received a AAA issue rating, supported by an innovative partial guarantee structure under which the Asian Infrastructure Investment Bank and the Asian Development Bank provided guarantees covering 95 percent of the bond's principal and interest payments.

Analysts said the enhanced credit profile helped significantly lower the bond's coupon rate and improve investor acceptance.

Paul Rui, director at the Investment Banking Department of CICC, said the partial guarantee arrangements — the first of its kind in China's onshore bond market — helped lower entry barriers and could offer a replicable model for other developing economies.

"Many emerging market economies have strong financing demand in infrastructure, green transition and livelihood development, but often face challenges such as ratings, investor recognition and issuance structures when entering a new market for the first time," Rui said.

"This transaction combined a sovereign issuer, multilateral development institution-backed credit enhancement, sustainable development-oriented funding purposes and access to China's renminbi bond market, providing a reference model for more Belt and Road economies seeking to enter China's bond market," he added.