On January 31, 2024, the New Development Bank (NDB) ─ a lender established by the BRICS nations in 2015 ─ issued a RMB 6 billion ($845 million) 5-year Panda Bond ─ a bond from a non-Chinese issuer sold in Mainland China ─ in the China Interbank Bond Market. With the Jan 2024 debt raise, the total issuance of Panda Bonds by NDB, since its inception, is RMB 47.5 billion ($6.67 billion).
The NDB debt raise comes on the back of a record year for Panda Bond issuance in 2023 ─ Deutsche Bank, the governments of Egypt and Poland, and the National Bank of Canada among other raised RMB 150 billion ($21.1 billion).
Bond issuers know a price arbitrage when they see one.
NDB’s panda bond was priced at 2.66%! (the 5-year UST is at 4.126%)
Ah, but the CNY has weakened you might say?
Indeed, the CNY has weakened by about 14% since March 2022 (which is about when the US Fed started raising rates) but it’s held its own rather well against the twin, tempestuous backdrops of the USD yield differentials and the PBOC’s massive easing measures.
The Chinese regulatory environment is also a lot more benign now.
Since December 2022, the PBOC and the State Administration of Foreign Exchange allows Panda Bond issuers to repatriate proceeds overseas.
There is another factor at play here ─ China’s M2 money supply.
While the US has seen its M2 money supply contracting thanks to the Fed tightening its balance sheet, China’s M2 money supply ─ increase in M2 leads to an increase in demands for bonds ─ has on the other hand been edging up steadily (see graph, China @ M2 of $41.5 trillion Vs. US @ M2 of $20.95 trillion, also China’s M2/GDP is 2x, nearly twice that of the US).
The gap between China’s M1 and M2 money supply remains wide (the PBOC did point out the significant jump in the M1 YoY growth of 5.9% in Jan 2024 Vs. growth rates that largely remained in the 1%-2% range for most of H2 2023 as ‘signs’ that the stimulus is working, but in absolute terms M1 is still only at $9.55 trillion at close of 2023 and trails M2 by a wide margin) and is indicative of liquidity that’s available but held tight-fisted.
Is that a recipe for a deflationary spell in the world’s second largest economy? (That’s perhaps a story for another day and hinges upon what the Chinese playbook for stimulus could eventually look like)
Doesn’t matter, the point here is deflation kindles the interest of bond holders, especially in long duration bonds.
So, if you combine that massive pool of Chinese M2 liquidity with global sovereign and corporate borrowers who ─ balking at multi-decade high USD rates ─ are looking at cheaper ways to raise debt, you will see why Panda Bonds are perhaps at the very beginning of a long runway that’s opening up.
