Pakistan to issue panda bonds to strengthen capital market ties with China

January 14, 2025 (MLN): Pakistan will issue yuan-denominated “panda bonds” as early as June to further integrate its capital markets with China’s, a move that will help Beijing in its push to expand the use of the currency, the South Asian country’s finance minister said.

In an exclusive interview with the Post on Sunday, Muhammad Aurangzeb also pledged more cooperation with Beijing on the next phase of the China–Pakistan Economic Corridor (CPEC) a key initiative for boosting bilateral trade and investment, as per the press release issued.

He also called for more participation from China’s private sector and export-led industries to transform Pakistan’s debt-laden economy.

Aurangzeb said Pakistan aimed to raise $200 million to $250mn from Chinese investors, adding that it was “absolutely critical” for the nation to diversify its funding base.

The minister is in Hong Kong for the two-day Asian Financial Forum, which began on Monday.

“Since I took over (in March 2024), I have been very vocal about this – that we want to go for panda bonds, an inaugural sovereign panda bond,” Aurangzeb said.

“I’m pushing everyone, including our own teams, to see if we can get this done before June", he added.

Panda bonds, typically denominated in yuan and issued in China by non-Chinese organizations, have gained traction.

This trend reflects efforts by traders and countries to diversify away from over-reliance on the US dollar while tapping into the world’s second-largest economy at attractive rates.

The minister added that Pakistan had followed Egypt’s lead to issue the yuan bonds on the back of credit improvement from the Beijing-led Asian Infrastructure Investment Bank (AIIB).

Last year, Egypt received guarantees from the AIIB and the African Development Bank, covering principal and interest, to issue panda bonds on the local mainland China market.

“I’ve met the president of the AIIB in Washington … with a very clear view that we will replicate what Egypt did in terms of the credit enhancement, which allows us to access the local capital markets for the panda bond,” he said.

Aurangzeb added that Pakistan would help to support the “internationalisation of the renminbi” and boost cooperation with the “second-largest and second-deepest capital market in the world”.

Despite its low credit rating, Pakistan is reportedly pursuing the issuance of Eurobonds in the 2026 financial year. But Aurangzeb has said his administration will try to achieve a “single-B” category of at least one major rating agency.

Pakistan has endured years-long inflation and was pushed to the brink of default in 2023 as its economy withered amid political chaos and economic mismanagement.

But the country’s economy rebounded last year as the inflation rate dropped from nearly 38% in May 2023 to 4.1% last month.

Aurangzeb, a veteran former banker at multiple global firms including J.P. Morgan, said that not using the world's second-largest capital market until now had "been a miss on our part."

"We are quite keen that during this calendar year, we do," he added.

Despite Pakistan's sovereign credit ratings being upgraded following a $7 billion IMF bailout and a 37-month extended loan agreement, it remains constrained within the "CCC" or "Caa" level.

This limitation restricts global financing options, even as key debt holders like China agreed to a one-year debt rollover.

Amid what he called the “balance of payment problem,” Aurangzeb emphasized the importance of enhancing CPEC 2.0 cooperation.

He added that the newest version of the flagship Belt and Road Initiative project would help the country manage its debt through an export-led model.

The CPEC is a key project under Beijing’s Belt and Road Initiative, with more than US$65 billion pledged for development in Pakistan, including roads and railways.

The second phase of the project, according to Pakistan, aims to set up special economic zones in partnership with China to reform the country’s agricultural and information technology sectors.

It also seeks to attract Chinese companies to relocate their low-end industries to the country.

During their meeting last June, Chinese President Xi Jinping and Pakistani Prime Minister Shehbaz Sharif highlighted the upgrade to the CPEC project.

Despite a failed attempt to sell the loss-making national flagship carrier Pakistan International Airlines (PIA) last fall, he said the government was "very hopeful" about relaunching the effort in the coming months.

Pakistan has also been mired in internal political turmoil, particularly since last February's controversial elections.

Aurangzeb dismissed the tensions as "typical democratic differences in domestic politics."

He emphasized the importance of all sides agreeing on fundamental points to move "the economy forward, because it is critical that we stay away from boom and bust cycles."

Aurangzeb said Pakistan was in trouble because the economy had been “primarily import-led”, which caused the country to “run out of foreign currency and get into a balance of payment problem”.

“Which means we have to fundamentally change the DNA of the economy towards export-led growth,” he added.

“CPEC phase two is all about primarily business-to-business, especially the economic zones. We want to make it work for some companies from the mainland to come in and use it as a real export hub", Aurangzeb noted.

“CPEC phase one was all about the infrastructure, and that is where most of this debt came in, if we go into phase two, where we go into export industries, we can create enough dollars and repay this debt,” he added.

Aurangzeb also pledged to step up security in his country to protect Chinese companies amid a series of deadly attacks in the region, with some targeting Chinese interests and personnel.

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