As the world continues to face financial challenges, China’s role as a major provider of development finance has been underscored over the past two decades. At the 2024 Forum on China-Africa Cooperation (FOCAC), China reaffirmed its commitment to expanding its financial market, encouraging African nations to issue panda bonds, while also pledging $51 billion in various forms of financing. This move offers African countries an alternative to borrowing at high-interest rates in the Eurobond market, providing them with access to capital at more favorable rates via China’s bond market.
A significant moment in this context came in December 2024 when former People’s Bank of China (PBOC) Governor Zhou Xiaochuan addressed the Caixin Annual Conference, outlining recommendations for optimizing China’s overseas investment. These suggestions included improving China’s external financing structure by shifting focus from debt to equity investment, increasing the issuance of panda bonds, and incorporating private and multilateral organizations into the investment ecosystem. These insights come at a crucial time, as the global community, including the UN-led efforts in preparation for the 4th International Conference on Financing for Development (FfD4), pushes to enhance development finance mechanisms.
Why Panda Bonds Are Gaining Traction
Panda bonds—renminbi-denominated bonds issued by non-Chinese entities—are gaining popularity as China’s financial market undergoes significant internationalization. By September 2024, over 1,100 institutions from more than 70 countries had invested in China’s interbank bond market, with foreign holdings reaching RMB 4.4 trillion (approximately $610 billion). The cumulative issuance of panda bonds has surpassed RMB 800 billion, drawing interest from top international issuers and investors alike.
What makes panda bonds particularly attractive is their tie to China’s domestic interest rates, such as the Shanghai Interbank Offered Rate (SHIBOR) and the China Government Bond (CGB) Yield. Unlike the traditionally lower rates seen in Western currencies, China’s interest rates have recently dropped while those of Western countries have risen, particularly in the wake of inflation control measures taken during the pandemic. As of January 2025, the yield on China’s 10-year government bonds reached a record low of 1.61%, significantly lower than the U.S. yield. This divergence makes panda bonds an appealing option for developing countries seeking low-cost financing options.
Panda Bonds: A Win-Win Strategy for China and Developing Countries
The issuance of panda bonds presents several advantages for both China and developing nations. For host countries, panda bonds offer an alternative funding option, reducing reliance on dollar-denominated bonds and enabling direct access to China’s bond market. This diversification reduces the financial risks associated with currency fluctuations and provides a new avenue for financing beyond traditional loans from Chinese financial institutions like the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM).
The panda bond market’s increasing liquidity further strengthens its appeal. In 2024, the market saw a surge in trading, with monthly volumes rising from around RMB 30 billion in 2023 to over RMB 50 billion. This improved liquidity provides greater market stability and enhances the attractiveness of panda bonds for international investors.
For China, the benefits of expanding the panda bond market are multifaceted. First, it supports the internationalization of the renminbi (RMB), helping to position China as a central player in the global financial system. Additionally, issuing panda bonds allows China to tap into private sector investment for development financing, relieving the burden on state-owned financial institutions. By facilitating investments from private capital, China can reduce its public-sector exposure while offering Chinese investors higher returns, as panda bonds typically offer more attractive yields than domestic treasury bonds.
Moreover, the increased participation of private creditors can strengthen China’s position in debt restructuring negotiations. Panda bonds, with their superior tradability compared to traditional loans, allow for more flexibility in managing overseas investments and improving the quality of China’s international financial portfolio.
Panda Bonds as a Tool for Debt Restructuring
The ongoing debt crisis in many developing countries, exacerbated by the COVID-19 pandemic, has led to increased scrutiny of debt restructuring efforts. According to the latest Debt Sustainability Analyses (DSAs) from the World Bank and IMF, 25 countries are at high risk of default, with 10 in severe debt distress. Although initiatives like the Debt Service Suspension Initiative (DSSI) have provided short-term relief, more comprehensive solutions are needed to address the long-term financing needs of these countries.
With China being one of the largest creditors to developing nations, its involvement in debt restructuring is critical. By the end of 2024, China’s outstanding foreign loans totaled $806.8 billion. Despite China’s active participation in debt rescheduling and reprofiling efforts, the effectiveness of these measures has been questioned. As traditional debt restructuring methods become insufficient, there is growing interest in using market-based debt swap mechanisms, such as the issuance of panda bonds, to address the crisis.
The “Shanghai Model,” proposed by Zhou Chengjun in 2021, offers a promising path forward. Inspired by the success of the Brady Plan in Latin America during the 1980s and 1990s, the model suggests using panda bonds in a “debt-to-bond” conversion, enabling debtor countries to swap their existing debt with new, lower-interest bonds. In this process, Chinese commercial banks have the flexibility to choose from various debt resolution options, such as offering par bonds with lower fixed rates or discount bonds with floating rates.
To further enhance the appeal of panda bonds, developing countries could use their foreign exchange reserves or concessional financing from institutions like the World Bank or IMF as collateral. This would reduce risks and improve market confidence in the bonds, potentially attracting more investors and offering a pathway out of debt distress for many nations.
Conclusion
The growing significance of panda bonds in global development finance represents an opportunity for China to assert its influence while providing a much-needed lifeline to developing countries. By diversifying funding sources and offering more flexible financing options, panda bonds can help alleviate debt burdens, promote sustainable development, and facilitate the internationalization of the renminbi. As the global financial landscape continues to evolve, the strategic expansion of panda bonds could be a key instrument in addressing the pressing challenges of the current debt crisis.
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