The renminbi revolution

Pakistan’s first Panda bond issue marks a new chapter in relations with China

Pakistan has issued its first Panda bond, a renminbi-denominated issue, RMB 1.75 billion, equal to $250 million, thus embarking on a journey for both itself and China. Pakistan is obtaining both money and access to a capital market it has not accessed so far, while China has moved a little further on the road of making its currency a world reserve currency. The bond issue reflects a change of guard, best symbolized by the fact that the bankers to the issue were the Asian Infrastructure Investment Bank and the Asian Development Bank. While the first is the bank set up by China to smoothen the path of its Belt and Road Initiative, the second is one of the Washington-consensus international finance institutions.

Perhaps more important than merely gaining access to a new source of financing is the possibility that Pakistan is getting in at an early stage on a new way of oil and gas imports. Part of the reason why the dollar is the world’s reserve currency is indeed the strength of the USA’s own economy, but also because the oil trade is carried out in dollars: oil exporters insist on being paid in dollars. That in turn forces oil importers to seek to earn dollars from their own imports. However, while the world still sees oil as crucial to its energy future, there is now an accompanying desire for the oil trade to be carried out in other currencies as well. The meeting of BRICS foreign ministers in New Delhi was taking place when the Bond was being launched, and is a forum where the renminbi might be seen with favour as  a replacement. The US and Israeli attack on Iran has decreased confidence on the dollar as a suitable currency for the oil trade.

The bond issue also reflected a confidence in the Pakistani economy that had not been there pf late, and which had remarked the stabilisation measures that had been carried out by the present government, and which made this the first Panda Bond issue in South Asia. The issue has not been planned as a one-off, being part of a Panda Bond programme of RMB 7.2 billion, the equivalent of $1 billion. However, the idea of Pakistan taking on more debt is not reflective of prudent financial management, and should be balanced by retiring some of the existing debr.