by Mandira Bagwandeen
original post on Daily Maverick
March 28, 2023
China’s commitment to helping African economies transition to low-carbon energy users was emphasised at the 8th Ministerial Conference of the Forum on China-Africa Cooperation (Focac) in 2021, from which a joint climate declaration titled the Declaration on China-Africa Cooperation on Combating Climate Change was produced.
The document notes that a strategic China-Africa partnership will be established to address climate change and that China and its African partners “will enhance coordination and cooperation in the multilateral process on climate, and jointly safeguard the legitimate rights and interests of China, Africa and other developing countries”. Both parties said they “stand ready to deepen South-South cooperation between China and Africa on climate change, expand areas of cooperation, and strengthen cooperation in [various] areas”.
On clean energy, China committed to further increasing investment in Africa’s solar, wind, and other renewable energy forms. This was reaffirmed in President Xi Jinping’s keynote speech at the conference and the China-Africa Cooperation Vision 2035.
China announced in September 2021 at the UN General Assembly that it would halt financial support and development of overseas coal-fired power stations and instead back green energy projects. In doing so, the Chinese may invest more in renewable energy projects to help meet Africa’s growing energy demand. According to a report by the International Renewable Energy Agency, Africa “could meet nearly a quarter of its energy needs through the use of indigenous, clean, renewable energy by 2030”. But this comes at a massive cost. Shifting to cleaner forms of energy would require, on average, $70-billion per year of investment between 2015 and 2030.
A report by the African Climate Foundation and the Institute of Development Studies housed at the Open University calls for “innovative solutions” to accelerate China’s clean energy investment in Africa and shift from its traditional policy bank lending model underwritten by Sinosure. This approach has historically favoured massive hydro and fossil fuel projects that have partly contributed to some countries’ debt distress.
Similarly, the Focac Dakar Action Plan (2022-2024) acknowledged the need for “innovative ways of financing” and called on institutional investors, subregional banks and continental financial institutions to help. China also noted that it “welcomes the issuance of panda bond[s] by eligible African sovereign, multilateral and financial institutions in the Chinese bond market to contribute to diversifying the financing channels for African market entities”.
What is a green panda bond?
A panda bond is a renminbi (RMB)-denominated bond issued in mainland China by a foreign entity (such as a national government, local government, multilateral development bank, regional development bank or non-financial institution). A green panda bond is essentially the same as other panda bonds, except that the issuer labels the bond “green”, proceeds are earmarked for green assets and projects, and the issuer tracks and reports on the use of funds to ensure compliance with China’s 2021 green taxonomy and other documents.
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China’s green bond market is attractive for foreign bond issuers; it has clear rules and regulations, active market players and supportive investors and policymakers. Essentially, the issuance of panda bonds, green or not, allows foreign entities to access the “deep and diversified investor base of China’s onshore bond market”, valued at $21-trillion as of 2022.
Since its launch in 2005, the panda bond has been slowly gaining the attention of foreign borrowers seeking to diversify their financing sources and access low-cost capital. With the gradual internationalisation of the RMB, the panda bond has become more attractive. In 2015, South Korea became the first sovereign panda bond issuer, after which other countries that became Belt and Road Initiative members followed suit.
For example, in June 2016, the Bank of China (BoC) signed a memorandum of understanding on panda bond issuance with Poland’s finance ministry and in August 2016 it became the first European country to issue a panda bond worth $451-million. Hungary issued its first panda bond in the Chinese Interbond Market in 2017, and its first green panda bond was issued in December 2021 at a value of $157-million.
Following this, its second green panda bond, worth $282-million, was issued in November 2022; in total, Hungary has issued four panda bonds since 2017. In the wake of Europe’s energy crisis, Hungary is pushing to generate 90% of its electricity from low-carbon sources by 2030. Securing funds through green panda bonds helps the country finance some of its clean energy projects.
At a multilateral level, the first green panda bond was issued in 2016 by the New Development Bank (NDB), established by the BRICS states (Brazil, Russia, India, China and South Africa) in 2015. The five-year bond, with a coupon rate of 3.07%, raised $448-million to support infrastructure and sustainable development projects in member countries.
Green panda bonds and Africa
In the context of financing Africa’s energy transition, regional and continental development banks (such as the African Development Bank (AfDB), the African Export-Import Bank, the Eastern and Southern African Trade and Development Bank, and the West African Development Bank) are more suitable panda bond issuers than African countries because they have stronger credit ratings, unlike several African countries that received harsh sovereign credit rating downgrades amid Covid-19.
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Leveraging green panda bonds through regional development banks will help raise the capitalisation of Africa’s development banks, enabling them to finance green projects. And by using African financial institutions as middlemen, it absolves China from most decision-making and dilutes accusations of Beijing being the primary culprit of debt stress in Africa. Furthermore, more Chinese investors are likely to back Africa’s green projects if Africa’s development banks (with good credit ratings) issue green panda bonds, as creditors’ concerns over debt sustainability are likely to be allayed.
To date, reports indicate that no African entity has managed to secure a panda bond since its launch in 2005.
More recently, though, reports emerged in 2022 that Egypt aims to enter the Chinese bond market in the first or second quarter of 2023. The Egyptian government is reportedly in talks with the Asian Infrastructure Investment Bank and AfDB over a guarantee for a panda bond worth $500-million to plug its financing gap. If successful, this would be the biggest panda bond issued by an emerging market sovereign, and Egypt would be the first B-rated issuer to print a panda bond, and the first African country to do so.
In March 2023, Egypt issued a formal notification of its equity position with the NDB. Becoming a member of this multilateral financing institution will not only reduce Egypt’s dependence on the US dollar and the euro, but is also likely to increase the odds of it issuing a panda bond.
Given a decrease in Chinese development lending to Africa, panda bonds are an alternative source of Chinese finance – providing a channel for African borrowers to access China’s onshore bond market to secure relatively cheap finance for development projects. The Chinese could view requests to issue green panda bonds by African entities favourably as Beijing redirects lending away from large infrastructure projects to focus on developing small to medium enterprises, financing green projects, and encourages private Chinese investment in Africa.
However, learning from their mistakes of fast and loose lending to the region, the Chinese will be more cautious and prudent in issuing panda bonds to African entities. With many African countries struggling to repay concessional and commercial loans, the Chinese will want to avoid creating another debt issue with bond repayments. As such, they are likely to be sceptical of issuing panda bonds to African entities with low credit ratings. In this context, African development banks (with good credit ratings) could be used as conduits for African countries to access (green) panda bonds. DM/MC/OBP
Dr Mandira Bagwandeen has experience working with think tanks, local and international corporate companies, and lecturing at universities in South Africa. Her primary research interests are China-Africa relations, Africa’s regional integration and industrialisation, digital governance, the geopolitics and geoeconomics of natural commodities, and South-South cooperation. Mandira is a Senior Researcher at the Nelson Mandela School of Public Governance at the University of Cape Town (UCT). She has produced commentary and written several articles on African development and China-Africa issues for peer-reviewed journals and various local and international media outlets. Her most recent article, Covid-19, African Agency and Debt Renegotiations with China, was published by the South African Journal of International Affairs, and her co-edited book, Africa’s Railway Renaissance: The Role and Impact of China, will be out in mid-2023.