IFC sees Panda bond market exceeding $50B by 2020

October 12
8:43 AM 2015

The Panda bond market in China is expected to surpass $50-billion mark in next five years. International Finance Corporation (IFC) is planning to sell bonds in Yuan-denominated from this year onwards.

The Chinese government has been pushing for inclusion of Yuan in International Monetary Fund's (IMF) basket of reserve currencies.

The Panda securities market has been open for foreign participants since 2005. IMF executive board is scheduled for voting in November on the inclusion of Chinese currency. 

The issue of renminbi bonds onshore by foreign borrowers is known as Panda bonds. The World Bank's IFC is closing working with the Chinese government on resolving technical aspects pertaining to selling Yuan-denominated bonds.

Converting accounting rules still needs to be worked out. IFC is also planning to sell green Panda bonds. However, the Chinese government is yet to give its approval for this.

If Yuan becomes a part of IMF's currency basket then the dragon country can access Special Drawing Rights (SDR).Once the Chinese Yuan becomes a part of SDRs, then naturally it'll lead to accumulation in Yuan-denominated assets.

Central Bank's reserve managers and institutional investors tend to prefer Yuan-denominated assets as soon as the Chinese currency is added to the International Monetary Fund's basket of reserve currencies.

The Chinese government is opening up its bond market in support of Yuan inclusion in IMF's basket of reserve currencies. The China's Central Bank People's Bank of China (PBOC) has allowed HSBC Holdings Plc to sell bonds in the interbank market. The London-based HSBC was the first foreign bank to get such approval from the Chinese government.

The issuance of onshore securities, Panda bonds, is expected to enhance relaxation of capital controls by 13 times to the tune of Yuan 100B ($15.8B) by 2020, according to Deutsche Bank AG.

IMF executive board is scheduled for voting in November. IMF is examining the Chinese currency whether it meets requirements of widely used and widely traded norms or not.

Though borrowing costs are high in China, multinational companies (MNCs) with offices in the world's second-largest economy can take benefits from the issuance of local debt as it'll decrease exposure to currency risk.

According to the guidelines framed in 2013 on Shanghai free trade zone, foreign firms registered with Chinese government can issue Panda bonds.

International Finance Corporation is negotiating with Chinese government involving Ministry of Finance and People's Bank of China on deciding terms and conditions for inclusion of Yuan in IFC's basket of reserve currencies.

IFC in 2005 launched a Panda bond issue in Chinese domestic market valuing Yuan1.13bn ($182.14mn). This is the first foreign issue in the Chinese domestic market. IFC issued Panda bonds in association with Asian Development Bank (ADB).

Chinese currency Yuan emerged as fourth mostly used in global payments in August. Yuan has a share of 2.79 percent in global payments and it surpassed Japan currency Yen, according to Society for Worldwide Interbank Financial Telecommunication (SWIFT).

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