Challenges and Opportunities in Panda Bonds for African Nations
Beijing recently hosted the China-Africa Cooperation Forum, welcoming delegations from over 50 African countries, where discussions centered on financial cooperation and the potential for African nations to tap into China's burgeoning panda bond market. However, significant challenges persist for these countries, primarily due to their existing debt burdens and underdeveloped market infrastructure. According to analysts from Reuters, while African governments have a long history of issuing bonds in foreign currencies like US dollars and euros, accessing the world's second-largest bond market remains an elusive goal.
Chinese President Xi Jinping has urged African nations to consider panda bonds, particularly during the recent China-Africa Summit. Yet, experts highlight that the Chinese yuan is not freely traded on the global market, which diminishes the appeal of these bonds for potential investors. Linda Erulu, an assistant professor at Georgetown University, pointed out that the limited global liquidity of the yuan poses a significant barrier for African issuers seeking to enter this market.
The Growing Panda Bond Market and Its Implications
Despite these hurdles, the panda bond market is witnessing rapid growth, with issuances reaching $18 billion in the first three quarters of 2023, already surpassing the total of $11 billion from the previous year. Although China's easing of issuance rules has made it more accessible for African nations, liquidity issues and the dollar's dominance in global trade continue to complicate the situation for these countries.
Jack Buffington, a professor at the University of Denver, emphasized that many African nations are keen to balance the influence of both US and Chinese markets as they explore options for expanding their manufacturing sectors. As a case in point, Kenya is preparing to issue $500 million in panda bonds this fiscal year and is actively seeking debt restructuring from China to facilitate this process.
While the US dollar remains the dominant currency in global trade, with a 59% share of the world’s reserve currency, the yuan's limited liquidity presents challenges for African nations considering a shift. Experts like Otavio Medeiros from Brazil have expressed skepticism regarding the transition away from the dollar, urging a focus on the more liquid dollar market for the time being.
In light of these complexities, Bangui Vihintola, CEO of Africa Finance Corporation, encourages African nations to pursue panda bonds, citing Egypt's successful issuance of a $500 million bond in Japan as a positive indicator. However, he cautions against an over-reliance on Western funding sources, advocating for a diversified approach to capital raising.
