SHENZHEN, CHINA – APRIL 12: A Chinese national flag is seen in the foreground with container ships, cranes, and stacked shipping containers at the Yantian International Container Terminal under cloudy skies, on April 12, 2025 in Shenzhen, China. (Photo by Cheng Xin/Getty Images)
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Foreign governments, Wall Street banks and multinational companies are flocking to China’s domestic bond market as some of the world’s cheapest borrowing costs turn the yuan into an increasingly attractive funding currency.
The yuan-denominated bonds, also known as panda bonds, are sold by overseas issuers in China’s onshore market and have become a major beneficiary of Beijing’s push to internationalize its currency amid a widening gap between Chinese and Western interest rates.
Issuance has accelerated sharply this year, with sovereign borrowers including Kazakhstan and Pakistan joining global financial institutions such as Morgan Stanley and Deutsche Bank, as well as multinational firms including Volkswagen and Henkel. Deutsche Bank, as recently as late May, announced that it raised 3.5 billion yuan ($518 million) through a heavily oversubscribed three- and five-year panda bond offering.
Panda bond issuance has remained robust in recent years. The issuance volume hit a record 197.8 billion yuan in 2024 and totaled 183.1 billion yuan in 2025, according to Moody’s. Issuance exceeded 137.1 billion yuan by the second week of June, up 80.4% from a year earlier.
Panda bond issuance totaled 26.64 billion yuan in May, the highest on record for the month, according to Fareast Credit Rating.
The appeal is straightforward: money is cheap in China.
While borrowing costs in dollar markets remain elevated as the Federal Reserve keeps rates high, China’s prolonged economic slowdown and accommodative monetary policy have left domestic interest rates near historic lows.
Analysts estimate many foreign issuers can raise yuan funding at coupons below 3%, significantly cheaper than comparable dollar borrowing.
“We view the key driver as the interest rate gap: funding in RMB is much cheaper than in U.S. dollars,” Moody’s Ratings told CNBC in an email.
According to the financial risk assessment group, foreign banks issuing panda bonds can borrow at roughly 1.7% to 2.2%, compared with 4.5% to 5.5% in dollar markets, generating interest savings of two to three percentage points.
An ‘old yen’ play?
That cost advantage has effectively transformed the yuan into a funding currency, analysts said, echoing the role the Japanese yen played in global finance for decades.
“It’s basically the old yen idea,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis. “It’s cheap funding.”
Moody’s estimates that foreign issuers now account for nearly half of the panda bond issuance volume this year, up sharply from just a few years ago. Financial institutions remain the dominant group, followed by sovereign and supranational borrowers, while multinational corporations with large operations in China are also increasingly tapping the market.
“Wall Street banks are expanding RMB borrowing to support the growing use of yuan in international trade settlement,” said Dan Wang, China director at Eurasia Group. “Banks need larger RMB liability and RMB asset holdings to remain key relationship banks and market makers for China-linked clients.”
Yet low rates alone do not explain the recent surge in issuance. For years, foreign interest in panda bonds was constrained by one major obstacle: capital controls.
Issuers could raise yuan within China, but moving the proceeds outside the mainland was often cumbersome and subject to regulatory uncertainty. That made panda bonds attractive mainly to companies with substantial operations inside China.
What has changed is Beijing’s growing willingness to allow greater flexibility over how proceeds are used, according to experts. Natixis’ Herrero said the easing of restrictions marks a significant shift in policy thinking.
“China did not allow the exit of capital [previously],” she said. “China is ready now. China does want to internationalize the currency.”
The policy change is particularly important for sovereign borrowers such as Kazakhstan and Pakistan, which have little reason to raise yuan unless the proceeds can ultimately be deployed outside China.
The latest sign of Beijing’s commitment came on Wednesday, when People’s Bank of China Governor Pan Gongsheng announced new measures allowing overseas central banks and sovereign wealth funds to access yuan liquidity using Chinese bonds as collateral, further strengthening the infrastructure supporting offshore RMB use.
Peter Alexander, founder of Z-Ben Advisors, said panda bonds should be viewed alongside China’s efforts to expand the use of its Cross-Border Interbank Payment System, an alternative to the SWIFT messaging network, while encouraging commodity trade settlement in yuan and deepening offshore RMB markets.
“The entire Panda Bond market has been slowly building over the past two years,” Alexander said. “It should be viewed more as an integral part of Beijing’s strategy to internationalize the RMB.”
Few expect the momentum to fade soon. Analysts pointed to abundant liquidity in China’s banking system, expectations that U.S. interest rates will remain relatively high, and continued policy support from Beijing as factors underpinning issuance through the remainder of the year.
Analysts said the biggest risks include a sharp narrowing of interest-rate differentials, significant yuan volatility or an unexpected policy shift by Chinese regulators.
