Analysis: China’s Bond Market Opening Offers No Solution for Debt-Laden African States, By Reuters

By Duncan Miriri and Samuel Shen

NAIROBI/SHANGHAI – Plans by African governments to tap into China’s domestic debt markets through panda bonds may face significant challenges due to existing high debt levels and a lack of sufficient market infrastructure, according to investors and analysts.

For the past three decades, African governments have sought financing by issuing bonds in foreign currencies, primarily U.S. dollars and occasionally euros. However, making inroads into the world’s second-largest bond market has proven difficult. This issue is a priority for both Beijing and the financially strained African nations.

During a recent China-Africa summit in Beijing, President Xi Jinping expressed his desire to "encourage and support Africa in issuing panda bonds in China."

Yet, there are fundamental obstacles that African issuers must overcome to raise funds on the Chinese mainland. According to Lynda Iroulo, an assistant professor at Georgetown University in Qatar, the currency is not freely traded worldwide, which diminishes the appeal of these bonds.

Despite the challenges, the panda bond market is experiencing growth. In the first three quarters of 2023, issuance reached $18 billion, surpassing the total for all of 2022, which stood at $11 billion. This increase followed a relaxation of rules by Beijing aimed at making it easier for issuers. A significant change allows issuers to decide whether to use the proceeds within China or repatriate them.

Additionally, lower interest rates in China make it a more attractive market compared to the United States, with a 150 basis point differential for three-year bonds. Christopher Lee, S&P’s chief analytical officer for Asia-Pacific, noted that onshore funding costs in China are expected to remain lower, as the central bank has more flexibility to cut interest rates.

African nations seeking closer trade relationships with China might consider entering the panda bond market, said Jack Buffington, a professor at the University of Denver. He noted that countries with potential for growth in manufacturing and supply chains are eager to balance their influence between the U.S. and China.

Panda bond issuance could enhance the financial connections between China and Africa, the latter of which is heavily indebted to China. For instance, Kenya is eyeing a debut issuance of a $500 million panda bond this financial year. President William Ruto has engaged China in discussions about restructuring Africa’s debt to include longer grace periods and extended loan tenures.

Kenya’s recent membership in the Asian Infrastructure Investment Bank (AIIB) was a critical step for pursuing panda bond issuance, as it allows access to concessional funding. The AIIB previously guaranteed Egypt’s issuance of a 3.5 billion RMB sustainable panda bond last year, marking Africa’s first such issuance.

However, concerns about liquidity in the market could hinder African nations’ ability to pivot towards Chinese bond markets. Even though the dollar’s share as a global reserve currency has declined, it remains dominant in international trade and finance. Buffington warned that a shift to Chinese currency for emerging market issuers would require significant changes in the financial system.

Government debt managers are particularly concerned about liquidity, as less frequently issued bonds may carry higher premiums for investors. Otavio Medeiros, Brazil’s undersecretary of public debt, mentioned that in the short term, it may be more prudent to focus on the liquid dollar market instead of exploring panda bonds.

Conversely, Hungary has been actively issuing panda bonds since 2017 and maintains strong trade relations with China. Despite ongoing issues regarding trade settlements and liquidity depth, like other emerging market issuers, there is reluctance to issue bonds in renminbi.

Nevertheless, African countries should persist in their pursuit of panda bond issuances, according to Banji Fehintola, executive director at Africa Finance Corporation (AFC). He advocated for collaboration with partners to facilitate progress.

Fehintola pointed to Egypt’s successful issuance of a $500 million Japanese samurai bond last year with AFC’s assistance as a model for Africa’s potential to access new financial markets. He argued that traditional strategies focused solely on Western markets are not optimal, urging a broader perspective on funding sources.