EU states adopt 'panda bonds' in Chinese outreach

14:06 | 11/06/2019 Global Economy

EU members Hungary, Poland, Portugal and soon Austria are strengthening ties with China by issuing attractive "panda bonds" that help Beijing raise its profile on international financial markets.

Source: AFP

On May 30, Portugal became the first eurozone nation to issue renminbi-denominated bonds, raising two billion renminbi (US$280 million) via a three-year instrument at a rate of 4.09 per cent.

The offer attracted strong demand, and Portugal's junior finance minister Ricardo Mourinho Felix told the financial news website ECO that Lisbon's goal was "to enter a large market with strong liquidity."

Poland and Hungary have already issued bonds on the Chinese market, in 2016 and 2017-2018 respectively, and Austria and Italy - eurozone members like Portugal - have said they might do so as well.

The cost of borrowing on Chinese markets is much higher than in Europe however, so the reasons for such a move likely lie elsewhere.

By helping China become a bigger actor on the global financial stage, governments can get into Beijing's good books, and attract investment in sectors like financial services, infrastructure and transportation.

The bonds have existed since 2005 but they took off four years ago when the Chinese central bank decided to encourage their use as Beijing launched the "Silk Road" initiative aimed at furthering China's economic and technical influence.

"Little by little, China is trying to open its market to investors and transform its money into a reserve currency," said Frederic Rollin, an investment strategy advisor at Pictet AM...

Amid growing trade tension between China and the United States, Portugal has followed Greece and several Eastern European countries in joining the "Belt and Road" project. Italy has as well, becoming the first member of the Group of Seven (G7) industrialised nations to back the project.

Rome has also said it would consider issuing "panda bonds", as Austria did in late April.

That has caught the attention of big EU nations like France and Germany.

"Since 2009/2010, China has begun to look for Trojan Horses" in Europe, said Christopher Dembik at Saxo Banque.

Beijing targets "countries that often have a greater need for investments and accept in exchange, and through an implicit agreement," to support the "panda bond" market, he added.

France and Germany, which have no problem placing sovereign debt in euros, are wary of Beijing's intentions.

Theo AFP