Panda Bonds explained: understanding China’s growing bond market

Panda bonds, first introduced in 2005, experienced record issuance in 2023 and 2024, driven by factors such as US-China monetary policy divergence and geopolitical tensions. Gross issuance reached renminbi (RMB) 155 billion in 2023 and RMB 195 billion in 2024.

In their research note, Deutsche Bank Research’s Perry Kojodjojo and Hazel Lai provide an in-depth analysis of Panda bonds, covering its evolution, growth drivers, key players, and outlook. Their insights have been summarised in this comprehensive guide.

What are Panda Bonds?

Panda bonds are bonds denominated in Chinese Yuan (RMB) and issued within China's domestic bond market by entities domiciled outside of mainland China. These entities can include:

• Chinese-owned companies incorporated in offshore financial centers but with primary operations in mainland China.
• Foreign corporations, financial institutions, and sovereign entities.

Launched in 2005 with the Asian Development Bank (ADB) and International Finance Corporation (IFC) as pioneers, the Panda bond market has since expanded significantly, attracting a diverse range of issuers.

Evolution and growth of Panda Bonds

Since their introduction in 2005, Panda bonds have experienced significant growth, particularly in recent years.

• Initially designed for international development organisations, Panda bonds faced slow growth in their early years.
• However, regulatory changes implemented from 2010 onwards expanded the pool of eligible issuers and provided greater flexibility in the use of proceeds.
• This, coupled with favorable financing costs, geopolitical tensions, and clearer regulations, led to a surge in issuance from 2023 onwards.

Drivers of growth in the Panda Bond Market

Several factors have contributed to the impressive growth trajectory of the Panda bond market:

• Regulatory reforms streamlined issuance processes, clarified the use of proceeds, and facilitated foreign exchange (FX) hedging, making it easier and more attractive for offshore entities to issue Panda bonds.
• Lower financing costs: Compared to USD bonds, Panda bonds often offer lower financing costs, making them a compelling option for corporates seeking to optimise their financing structures.
• Geopolitical considerations: Rising geopolitical concerns have encouraged a "China for China" strategy, with companies increasingly shifting their financing activities to the domestic market.

Key players in the Panda Bond Market

The Panda bond market comprises a diverse range of issuers and investors:

• Issuers: While corporations are the primary issuers of Panda bonds, financial institutions and supranational organisations also actively participate in this market.
• Geographic distribution: Mainland China and Hong Kong-based issuers dominate the Panda bond market, although participation from foreign entities is steadily increasing.
• Investor base: Investor demand for Panda bonds is on the rise, with onshore investors attracted to their high credit quality and attractive yields, while offshore investors seek exposure to the Chinese RMB.

Panda Bonds vs. Dim Sum Bonds

While both Panda bonds and Dim Sum bonds are denominated in RMB, they differ in key aspects:

• Market size: The Dim Sum bond market is currently larger than the Panda bond market.
• Issuer base: Panda bond issuers are predominantly corporates, while Dim Sum bonds see significant issuance from financial institutions.
• Listing and issuance process: Dim Sum bond listings are more aligned with global norms, offering a potentially more streamlined process for issuers familiar with international markets.

Despite these differences, both Panda bonds and Dim Sum bonds play complementary roles in promoting RMB internationalisation and provide valuable options for issuers and investors seeking RMB exposure.

Deutsche Bank clients can access the full report here