Pakistan Turns to Panda Bonds: How These Chinese Yuan-Denominated Bonds Could Boost the Country’s Finances

Cash-strapped Pakistan, heavily reliant on loans from the International Monetary Fund (IMF) for months, is exploring a new bond scheme to raise funds. The country plans to issue Chinese currency yuan-denominated Panda bonds in 2024 to bolster its finances.

Pakistan’s Finance Minister Muhammad Aurangzeb stated that the government intends to raise between $200 million and $250 million from Chinese investors over the next six to nine months. He emphasized the importance of tapping into China’s capital markets, stating, “We have been remiss as a country not to tap it previously.”

Aurangzeb also mentioned that China International Capital Corporation is assisting Pakistan in issuing these Panda bonds. He reiterated the importance of diversifying the country’s funding sources, calling it “absolutely critical” to Pakistan’s financial stability.

Initially, Pakistan had aimed to raise $300 million from the bonds, but the revised target is lower than what was expected earlier in 2024. Aurangzeb had pushed for issuing these bonds, referring to it as a major step in securing international funding before June.

What are Panda Bonds?

Panda bonds are yuan-denominated debt instruments issued in China’s capital markets by non-Chinese entities. They offer foreign issuers, including governments and corporations, the opportunity to access funds from Chinese investors, while diversifying away from reliance on the US dollar. Countries like Egypt have successfully issued Panda bonds with credit enhancements, and Pakistan is following a similar path.

Pakistan’s move to issue these bonds comes after a recent upgrade in its sovereign rating. Aurangzeb hopes the country can improve its rating further and reach the “single-B” category, allowing it to return to global bond markets for additional funding.

How Panda Bonds Benefit China

Issuing Panda bonds will further integrate Pakistan’s capital markets with China’s, assisting in Beijing’s goal to expand the use of the yuan. Aurangzeb noted that Pakistan would help support the “internationalisation of the renminbi,” enhancing cooperation with the world’s second-largest capital market.

Despite issuing Panda bonds, Pakistan remains dependent on the IMF bailout package. The country, which faced the risk of default in 2023, is now showing signs of improvement with a significant decrease in inflation, from 38% in May 2023 to 4.1% in December 2024. However, Aurangzeb stressed the need for the economy to shift from being import-led to an export-driven model.

The government is optimistic about meeting the terms of its ongoing IMF $7 billion loan agreement, with an IMF delegation set to visit Pakistan next month. They are pushing for a broader tax base and a target of 13.5% tax-to-GDP ratio, up from 10% in December 2024.