Pakistan’s financial future hangs in the balance as the country struggles to bridge its funding gap and strengthen its economic ties with China.
The willingness to issue Panda Bonds marks a significant turning point in this journey, offering a unique opportunity for Pakistan to tap into China’s vast liquidity and diversify its funding portfolio.
As the country looks eastward to meet its financial challenges, the Panda Bond initiative holds the key to unlocking a brighter economic future.
China’s Panda Bond market
Panda Bonds are yuan-denominated debt instruments issued by foreign entities in China’s onshore market. They provide an alternative financing mechanism for governments and corporations seeking to tap into China’s vast liquidity while also supporting the internationalization of the Chinese yuan (RMB).
For Pakistan, this move represents an effort to diversify its financial resources and reduce reliance on traditional Western markets.
China’s financial market has experienced a remarkable upswing in internationalization in recent years. The opening up of China’s interbank bond market has gained momentum through the issuance of Panda Bonds.
Over 1,100 institutions from more than 70 countries have participated in China’s interbank bond market, with foreign capital holdings reaching 610 billion.
The cumulative issuance of Panda Bonds has surpassed 800 billion yuan, demonstrating their appeal to top global issuers and investors. Notable participants include Egypt, which successfully raised 500 million, and the New Development Bank (NDB), the largest issuer in the Panda Bond market to date.
Why now? The strategic context for Pakistan
Pakistan faces escalating debt pressures, low foreign reserves, and restricted access to global credit markets due to its weak credit rating.
The country’s financing gap, estimated to exceed $5 billion over the next few years, has forced policymakers to seek innovative solutions.
Panda Bonds offer a timely opportunity to access China’s deep financial markets, especially as the gap between RMB and US dollar yields widens, making borrowing in yuan relatively cheaper.
The plan comes as Pakistan’s sovereign rating has recently been upgraded by all three credit agencies. Policymakers foresee further upgrades, and the challenge is to move into the “single-B” category, which would allow the country to return to global bond markets to raise funds.
This strategic pivot aligns with the broader objectives of the China-Pakistan Economic Corridor (CPEC). By leveraging Panda Bonds, Pakistan not only diversifies funding sources but also strengthens its partnership with China, which remains one of its largest trading partners and key investors.
Pakistan’s debt dependence on China
China has the single largest share of debt to Pakistan with 22% share (USD 28.786bn), followed by World Bank’s 18% share (USD 23.55bn) and Asian Development Bank’s 15% share (USD19.63bn).
Recently, Pakistan requested a two-year rescheduling of $3.4 billion debt maturing during the IMF programme period, highlighting its reliance on Chinese support to meet external financing gaps.
Historically, China has rolled over Pakistan’s debt, allowing a cash-strapped country to make interest-only payments. This pattern of rescheduling emphasizes the crucial role of Chinese financial assistance in sustaining Pakistan’s external account stability.
The potential benefits
Pakistan’s decision to issue Panda Bonds holds a significant promise, with several benefits that could transform its fiscal architecture.
By borrowing in RMB, Pakistan can tap into a more cost-effective funding source, slashing its funding costs compared to traditional Eurobond markets. This move also opens the door to a new investor base, as Panda Bonds can attract Chinese institutional investors and diversify Pakistan’s investor portfolio.
Furthermore, issuing in the Chinese market sends a powerful signal of Pakistan’s commitment to deepening its economic ties with China, a move that could yield significant geopolitical and strategic benefits. Pakistan can also mitigate foreign exchange risks and reduce its exposure to currency fluctuations.
And, if successful, this initiative could send a strong message to the global financial community, boosting Pakistan’s financial credibility and market signaling.
Challenges on the road to issuance
Despite its potential, the Panda Bond initiative is not without hurdles. Pakistan’s low international credit rating poses a major challenge, as standalone issuance is unlikely to attract significant interest.
Arranging a guarantee from multilateral development banks would be crucial but also time-consuming. Additionally, routing China’s complex issuance process dominated by local banks and modest deal sizes requires expertise and strategic alignment.
Currency fluctuations in the RMB could further complicate debt servicing. Moreover, marketing the bonds effectively to Chinese investors, who often weigh geopolitical considerations alongside financial metrics, will require a compelling narrative around Pakistan’s economic stability and growth path.
Learning from global peers
Emerging economies like Hungary, Singapore, the Philippines and Japan have successfully tapped into the Panda Bond market, demonstrating its viability as a funding tool. Egypt’s debut issuance, backed by multilateral guarantees, set an example of how to overcome creditworthiness concerns. Pakistan could emulate these strategies to position itself as a credible issuer.
Outlook: a calculated step forward
Pakistan’s readiness to issue Panda Bonds demonstrate Pakistan’s strategic shift eastward, signaling an integration into China-led financial systems.
With significant external debt repayments due by 2029, Panda Bonds can act as a stopgap to meet short-term financing needs without relying solely on multilateral institutions. If executed effectively, this initiative could be a game-changer for Pakistan’s economy, paving the way for a new era of cooperation and growth.
Copyright Business Recorder, 2025
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