“The Philippine Panda Bond” by Malcolm Cook

2018/25, 16 March 2018

In the next week or two, the Philippine government plans to issue its first panda bond (a renminbi-denominated bond issued by a non-Chinese borrower to investors in China). The planned ¥1.46 billion ($200 million) issuance, if successful, would be a win-win-win development for the Philippines and China.

For the Philippines, panda bonds offer two benefits. First, they diversify the government’s borrowing portfolio at a time when the Duterte’s ‘Build, Build, Build’ infrastructure agenda requires more overseas borrowing. The Philippine government has already issued yen-denominated samurai bonds with more planned. Second, Panda bond issuances require a rating by a Chinese credit rating agency. China Lianhe Credit Rating Co. has offered the much desired AAA rating for the coming Philippine panda bond offering. This is a much higher rating than the BBB sovereign credit rating for the Philippines offered by Moody’s and Standard & Poor’s. This superior rating should boost interest in the issuance and lower the bond’s yield. Since the beginning of the year though the Philippine peso has depreciated more against the renminbi (7.1%) than against the US dollar (4.0%) but less than against the yen (10.1%).

For China, the Philippines would become the first East Asian government to avail itself of panda bonds. While these bonds have been around for over a decade, their uptake has been modest. 2017 saw only ¥11 billion of panda bonds issued. Deepening China’s bond markets and attracting more foreign entities to issue bonds in China is good for China’s financial system and global influence. Globally, the US, through the dollar, is the dominant financial power in the post-war period. About 63% of Philippine external debt (private and public) is dollar denominated. Japan has been the lead financial power in Asia. About 13% of Philippine external debt is yen-denominated. Yuan-denominated debt is insignificant in the Philippines. Growing use of panda bonds, particularly by governments in the region, would help reduce this yawning gap in China’s influence and leadership.

When President Duterte came to power in June 2016, Manila and Beijing committed to boosting economic relations to the benefit of both. The Philippines first panda bond, if successful, would help deliver on this promise.

Dr Malcolm Cook is Senior Fellow at ISEAS-Yusof Ishak Institute.
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