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Pakistan’s Economic Strategy: The Introduction of Panda Bonds and Enhanced Cooperation with China

Pakistan has announced plans to issue yuan-denominated "panda bonds" as early as June, a significant development aimed at further integrating its capital markets with China. This initiative, articulated by Pakistan’s finance minister, is part of a broader strategy to bolster economic ties with Beijing and expand the usage of the yuan in international trade. Such a step is critical not only for financial diversification but also for enhancing China’s efforts to internationalize its currency, moving away from an over-dependence on the US dollar.

Exclusive Interview Insights

In an exclusive interview with the Post on a recent Sunday, Finance Minister Muhammad Aurangzeb underscored the necessity for closer collaboration with China, particularly regarding the next phase of the China-Pakistan Economic Corridor (CPEC). This initiative is pivotal for increasing trade and investment between the two nations, promising mutual economic benefits and long-term growth opportunities.

Aurangzeb emphasized the need for greater participation from China’s private sector and its export-led industries. He believes that such collaboration could significantly assist Pakistan in transforming its heavily indebted economy into a more viable and sustainable model. The minister’s vision reflects a proactive approach to economic recovery and growth.

Funding Goals and Panda Bonds

Pakistan is targeting the raising of between US$200 million and US$250 million from Chinese investors through the issuance of these panda bonds. Aurangzeb stated that diversifying Pakistan’s funding base is "absolutely critical," particularly in light of the nation’s recent economic challenges. The finance minister is attending the Asian Financial Forum in Hong Kong, where he hopes to expedite this initiative.

"I have been very vocal about this—our intent to issue panda bonds, particularly the inaugural sovereign panda bond," he explained. He urged his team to expedite the process to ensure that issuance occurs before the impending June deadline. These panda bonds, which are typically denominated in yuan and issued in China by foreign entities, have gained increasing popularity as investors and nations seek to diversify their portfolios while accessing attractive rates within the world’s second-largest economy.

Following in Egypt’s Footsteps

Aurangzeb noted that Pakistan’s decision to issue yuan bonds follows Egypt’s successful move, which was positively influenced by credit improvements from the Asian Infrastructure Investment Bank (AIIB). Last year, Egypt secured guarantees from the AIIB and the African Development Bank, allowing them to successfully issue panda bonds in China’s mainland market.

"I met with the president of the AIIB in Washington, clearly stating our intent to replicate Egypt’s strategy regarding credit enhancement," he said. This credit support is essential for Pakistan to access local capital markets for its panda bond offering, showcasing a strategic approach to financing.

Supporting the Internationalization of the Renminbi

Aurangzeb reiterated that Pakistan would play a crucial role in supporting the "internationalization of the renminbi," while emphasizing the importance of strengthening ties with one of the largest and deepest capital markets globally. Despite facing a low credit rating, Pakistan is reportedly seeking to issue eurobonds during the 2026 fiscal year, with plans to improve its credit rating classification to at least a "single-B" category from one of the major rating agencies.

Recent Economic Challenges

Pakistan has faced significant economic turmoil, characterized by prolonged inflation and a near-default situation in 2023 due to political instability and inadequate economic management. However, there has been a marked improvement recently, with inflation dropping sharply from nearly 38 percent in May 2023 to a mere 4.1 percent last month.

The country reached an agreement with the International Monetary Fund on a 37-month extended bailout loan of approximately US$7 billion, further bolstered by a one-year debt rollover agreement from major debt holders, including China. According to Aurangzeb, addressing the ongoing balance of payments issue will be a priority, and enhancing CPEC cooperation—termed CPEC 2.0—will be vital to overcoming the country’s economic hurdles by fostering an export-led growth model.

The Role of CPEC in Economic Reform

The China-Pakistan Economic Corridor, a cornerstone project of China’s Belt and Road Initiative, has more than US$65 billion committed for development in Pakistan, including critical infrastructure like roads and railways. Aurangzeb highlighted that the second phase of CPEC aims to establish special economic zones in collaboration with China, focusing on restructuring the agricultural and information technology sectors while enticing Chinese firms to relocate less advanced industries to Pakistan.

During their meeting last June, Chinese President Xi Jinping and Pakistani Prime Minister Shehbaz Sharif emphasized upgrading the CPEC project to accelerate cooperation and improve economic conditions in Pakistan.

Aurangzeb expressed urgent concerns regarding Pakistan’s previous economic strategies, noting that the country had been primarily import-led, leading to a critical depletion of foreign reserves and subsequent economic instability. "It’s essential to fundamentally change the economy’s DNA toward an export-led growth model," he asserted.

Future Prospects and Security Measures

The finance minister elucidated that Phase Two of CPEC focuses on business-to-business collaborations, particularly in economic zones envisioned to act as export hubs. Unlike the first phase, which significantly accrued debt due to infrastructure development, moving toward export industries in Phase Two is expected to generate adequate revenues for debt repayment.

In light of security concerns, Aurangzeb committed to enhancing protection measures for Chinese enterprises operating within Pakistan, especially following a series of attacks targeting Chinese interests and personnel.

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This report originally appeared in the South China Morning Post, a leading source of news and analysis concerning China and Asia. For more insights and updates, consider visiting the SCMP app and following their social media channels.

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