Panda Bonds In Africa : The Internationalization of the Yuan continues ...

Beijing’s push to internationalise the yuan is gaining a new vehicle in Africa. Another major multilateral lender is set to diversify towards the Chinese currency to slash borrowing costs and reduce the risks of dollar volatility.

Multilateral lender Africa Finance Corporation (AFC) has confirmed that a debut panda bond issuance is “on the table for this year”, as it looks to deepen its ties with Chinese capital markets.

Banji Fehintola, the executive director for financial services at the AFC, said entering Chinese capital markets was a “natural evolution” of a strategy. A strategy based on an established track record with major Chinese lenders, such as China Exim Bank, the Industrial and Commercial Bank of China (ICBC) and Bank of China.

Fehintola said that while the precise timeline had not been set, investor roadshows were complete and a mandate was in place to act “at short notice” once market conditions were right. He said the issuance remained “an important part of our funding plan”.

With Chinese benchmark rates at 1.8 per cent compared to more than 4 per cent in the US, AFC could halve its interest burden through the panda bond, which is yuan-denominated debt issued in China by foreign entities.

The lender’s AAA rating from S&P Global (China) Ratings and China Chengxin International last year also helps to attract equity from Chinese pension and sovereign wealth funds. Fehintola said these ratings “demonstrate the quality of the institution” and showed the credit profile was excellent for high-level investors from China.

AFC is following Afreximbank, another African multilateral lender that issued its inaugural 2.2 billion yuan (US$318 million) panda bond last year. Egypt, became the first African sovereign to enter the market in 2023 with a 3.5 billion yuan issuance.

This aligns with Beijing’s goal to internationalise the yuan, allowing African nations or financial institutions to bypass the US dollar reducing their exposure to exchange rate volatility.

Fehintola said entry into the Chinese capital market would see the corporation embracing local currency debt. “It is often more efficient to borrow in yuan directly and use that for trade rather than going through another currency first.”

He said that given AFC’s “deep pipeline of transactions across the continent” involving large Chinese contractors and buyers, the corporation was already discussing settling transactions in yuan.

Fehintola suggested that “yuanisation” was a growing trend, and something “you will certainly see more of” across Africa. Notably, copper-rich Zambia now accepts taxes in Chinese currency, and Africa’s largest bank, Standard Bank, has joined China’s [Cross-Border Interbank Payment System] clearing house to ease cross-border settlements.

Beijing has been shifting away from traditional government-to-government lending towards channelling financing through multilateral institutions such as AFC, the African Development Bank and Afreximbank, to mitigate default risks.

China Exim Bank has provided US$700 million in direct financing to AFC, which has also raised funds via syndicated loans – including a US$1.16 billion deal in 2024 co-led by ICBC and Bank of China, and a US$1.5 billion facility in late 2024 involving Bank of Communications.

By positioning itself as an intermediary, AFC allows Beijing to fund major projects in Africa as it mitigates the risks associated with direct lending to cash-strapped governments.