Clued-in | Beyond finance: Strategic logic behind Pakistan's first panda bond

Pakistan's first access to China's domestic capital market should be seen against the backdrop of the strengthening China-Pakistan economic relationship since the early 2000s. The China-Pakistan Free Trade Agreement (CPFTA) was signed in 2006. The two sides launched negotiations on the second phase of CPFTA in March 2011, concluded the negotiations and signed the Protocol in April 2019.

In December 2011, the State Bank of Pakistan and the People's Bank of China signed a bilateral currency swap agreement worth 10 billion yuan to promote bilateral trade, investment and financial cooperation.

To date, China is Pakistan's largest trading partner. If more import contracts were settled in RMB, companies could create a natural hedge against exchange rate losses by matching their revenues and expenditures in the same currency, eliminating the need to convert dollars into RMB.

In 2015, bilateral cooperation marked a major breakthrough under the Belt and Road Initiative (BRI) with the official launch of the China-Pakistan Economic Corridor (CPEC). Since then, Chinese commercial banks operating in Pakistan, such as the Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC), have been lending to the public sector as well as the private sector on internationally competitive terms.

Three Chinese exchanges—the China Financial Futures Exchange, the Shanghai Stock Exchange, and the Shenzhen Stock Exchange—together hold approximately 30 percent of the Pakistan Stock Exchange. This partnership facilitates Pakistani companies seeking cross-border listings on Chinese stock exchanges and attracts Chinese institutional investors. Successful issuance of the panda bond, which is a RMB-denominated bond issued by overseas entities in China, would further boost recognition of Pakistan's sovereign credit.

To fully understand Pakistan's strategic logic behind its first panda bond, one must look at it through the lens of this comprehensive bilateral cooperation. For Pakistan, the panda bond should be viewed as a strategic instrument for diversifying external financing, reducing borrowing costs, and deepening financial engagement with China.

The concept of the panda bond was introduced in the mid-2000s as part of China's gradual opening of its domestic financial markets. Today, panda bond issuers span a wide range of entities, including sovereign institutions from countries like Hungary, Slovenia, and Kazakhstan, international development agencies such as the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB), as well as major international financial institutions and multinational corporations. Public data shows that in the first half of this year, panda bond issuance exceeded 160 billion yuan, up by more than 60 percent year-on-year.

Pakistan's successful inaugural panda bond in May 2026 demonstrated that Chinese investors are willing to finance Pakistan when supported by credible reforms and multilateral guarantees. The issuance of 1.75 billion yuan was more than five times oversubscribed and carried a coupon of 2.5 percent—substantially lower than Pakistan's recent U.S. dollar borrowing costs. This oversubscription at its very first appearance in a new market sends a reassuring signal to global capital markets, enhancing perceptions of Pakistan's sovereign credit and optimizing the pricing of future international bond issuances, particularly those without multilateral guarantees.

Previously, Pakistan's traditional sources of external funding were multilateral institutions, such as the International Monetary Fund, the World Bank and the ADB, alongside bilateral official aid, Eurobonds, Sukuk and commercial bank loans. Access to the Chinese onshore bond market opens up a new channel for diversifying its funding base.

Ishrat Husain is former Governor of the State Bank of Pakistan and former Chief Economist of the World Bank.