Austria joins Portugal in seeking to tap China’s bond market, but the market is small

Countries tap Panda bond market to help relations, not for costs

Austria is working on plans to sell Panda bonds as it races with Portugal to become the first euro-zone country to issue debt in the Chinese currency.

Austria’s Treasury Agency signed a memorandum of understanding with Industrial and Commercial Bank of China Ltd. to cooperate on a plan for Austria’s government to issue Panda bonds, according to a release dated April 28 on the official WeChat account of ICBC. The bank was named lead underwriter and bookrunner for the deal, with Bank of China and HSBC as joint lead underwriters, the statement said.

Austria would be the highest-rated sovereign to issue Panda bonds, helping to deepen ties between the two countries, according to the statement. In December, Xinhua reported that Portugal was actively preparing to issue such bonds.

Austria Joins Portugal in Seeking to Tap China’s Bond Market – Bloomberg, April 29th

According to the Bloomberg article, China set up the panda bond market more than a decade ago for offshore issuers of yuan debt. Issuance slumped when China devalued the yuan in 2015, igniting fears of continuous depreciation. In 2016 and 2017, authorities began opening the domestic market to help offset capital outflows and promote greater use of the yuan.

China has vowed to push ahead with opening its bond market to foreign investors, with People’s Bank of China Deputy Governor Pan Gongsheng saying in January it was crucial for the development of the nation’s financial markets. Bloomberg Barclays Global Aggregate Index started adding the country’s government and policy bank notes in April. There are 275 billion yuan ($41 billion) of Panda bonds outstanding, according to Bloomberg-compiled data.

Poland was the first European sovereign to print Panda bonds in August 2016, followed by Hungary’s debut offering in July, 2017.

According to Dinheiro Vivo, Portugal’s Treasury will issue debt for three years. It is expected to finance 2 billion RMB, about 260 million euros. The interest payable will only be closed on the day of the transaction, but the cost should be above the euro bonds. This Tuesday in the secondary market, investors are accepting to lose money to hold Portuguese debt. The three-year bond trades at a negative rate of -0.223%.

The reasons for the sluggishness in the building of the Panda bond market are straightforward. While borrowers may seek to build relations with the Chinese Communist government, the bonds do come with a number of costs that diminish its practicality. First, the yuan’s central management requires buyers of this debt outside of China to hedge their yuan exposure, which is often very costly to investors. Second, Portugal’s interest rate will be higher. Currently, investors are paying to hold Portugal’s similar durationed, euro-denominated debt. According to investing.com, Portugal’s three-year euro bond is currently yielding -0.223%. Third, Portugal has to work directly with the underwriters for placement of the bonds, in a fashion similar to corporate bond underwriting.

Portugal would never attempt to create a large pool of Panda bonds for its borrowings. The interest costs alone would preclude this. But, it is clear that Portugal plans to continue building its relations with the ChiCom government, thus a few hundred million in Panda bond borrowings could help to grow relations as their bilateral trade expands over time.