Portugal’s finance minister, Mário Centeno, announced earlier this month that the country is in the final stages of becoming the first eurozone country to issue sovereign debt in China’s panda bond market. These comments come almost a year after the ministry disclosed that it had commissioned the Bank of China, HSBC, and Caixa Geral de Depósitos to draw up plans for this new form of debt issuance.
What exactly is the so-called panda bond market? This phrase refers to the on-shore trading of company and sovereign bonds in China. Previously, those entities that wanted to list their bonds in renminbi (RMB), the Chinese currency, had to do so offshore in Hong Kong. These bonds were known as “dim sum bonds”. It wasn’t until China permitted HSBC, in coordination with the Bank of China’s offshore arm, to issue bonds in 2015 that the panda bond market began to be enthusiastically tapped by both foreign companies and governments.
Portugal first revealed its plans to issue debt in China’s interbank bond market last September. The government noted that they expected to raise 3 billion RMB through the issuance of bonds with maturities of up to five years. While Portugal will be the first Eurozone country to do so, other governments including Poland, Hungary, and the Canadian province of British Columbia have already issued bonds in China’s panda bond market.
The Portuguese finance ministry confirmed that the government has already met 80% of its financing needs this year. At first glance, this investment may make Portugal’s decision to explore new financing options far from home look like an unnecessary adventure. However, this isn’t about meeting immediate financing needs. Instead, Portugal is focusing on its medium and long-term future in establishing a financial foothold in the panda bond market.
Portugal has significantly benefited from the ECB’s historic asset purchase programme. Also known as quantitative easing, the ECB has been buying sovereign debt on the secondary market for numerous Eurozone countries in order to reduce their cost of borrowing and kickstart the Eurozone economy. In Portugal’s case, this resulted in the cumulative purchase of more than 34 billion euros worth of sovereign bonds. However, with the ECB’s announcement that it will be ending quantitative easing this year, new purchasers of this debt will need to be found.
This is where the panda bear market comes into play. This fast-growing market is currently worth 9.5 tillion dollars and therefore provides a new source of liquidity for Portugal. While the country is more than able to tap European financial markets for funding, the panda bond market will allow it to diversify its debt holders, making it more resilient to any financial shocks that might occur closer to home.
Secondly, issuing debt in this market will help cement Portugal’s increasingly important relationship with China. A spokesperson for the Portuguese Prime Minister explained that “In practical terms, the issue aims to diversify the sources of financing of Portugal, opening a new market for its debt, and support the internationalisation of the (renminbi).” Portugal is the largest recipient of Chinese investment in Europe, expressed as a share of its economy. This debt issuance will act as an additional link between the two economies.
Interesting, Portugal isn’t the only Eurozone country to have considered this new financing opportunity. For instance, Italy has also expressed interest in exploring the panda bond market. As the Eurozone begins to wean itself off quantitative easing, Portugal could set a trend for governments seeking new investors for their sovereign debt.