Beijing is about to give the concept of 'soft power' a new spin. In Chinese, the word for crisis, (weiji), consists of two characters: wei, meaning 'danger' and ji, meaning 'opportunity'. Thus, in every crisis, the danger presented holds an opportunity. This is true of the global financial crisis. The cartoon movie Kung Fu Panda was all about the underdog coming out on top during a crisis. Amid the global financial crisis, China is about to offer the world a kung-fu-type solution to where to park your money (if you still have any). It's called the 'Panda bond'.
Panda bonds are a new fund-raising mechanism offered by the central government to international financial institutions which may wish to raise funds for themselves or their corporate clients through bond issues denominated in yuan. The catch is that the payback at the end of the bond term is also in yuan. China's central bank policymakers feared that funds raised in yuan and converted to US dollars might reduce the nation's foreign exchange reserves. Moreover, increasingly confident policymakers believe the yuan may be on the threshold of becoming the global currency of international settlement.
And it is little wonder that they think this way. Last September, China increased its US bond market exposure by US$43.6 billion, while Japan reduced its US bond exposure by US$12 billion, making China the creditor of the US. Many foreign bankers in the Chinese market now refer to China as 'America's banker'.
Between October and November, Beijing signed agreements with Hong Kong and seven neighbouring countries, including Russia, Mongolia, Vietnam and Myanmar, under which the yuan will become an international trade-settlement currency. Next, the central government aims to turn Shanghai into the main yuan settlement centre, with Hong Kong as a second one.
Like all major reforms in China, this one began with an experiment. In 2005, the central bank approved the issuance by the International Finance Corporation of the World Bank and the Asian Development Bank of US$1.13 billion and US$1 billion, respectively, in yuan-denominated bonds. At the time, regulations restricted the use of the yuan to within China only.
By issuing the Panda bond, Beijing believes it will effectively reduce its own exposure to the US market, the logic being that there is no need to buy other people's bonds when you have your own. On a deeper level, the global financial crisis gives China an opportunity to push forward the yuan's evolution into an international currency. In this respect, the Panda bond symbolises China's true emergence as an economic superpower.
