The Polish government has again signalled a willingness to strengthen its relationship with Beijing. In October, the Ministry of Finance announced that yuan-denominated government bonds would be issued on the Chinese market. This decision means that, after two years, Poland has re-joined the ranks of the few countries that are indebted in China under Panda bonds. This comes at a time when the Polish government is at loggerheads with the EU and transatlantic relations are tense. Was this a technical operation motivated primarily by potential financial benefits, or was it solely a political decision of international significance?
The amount of the issue of the three-year Polish bonds came to 3bn CNY (approximately 470m USD), with a yearly interest rate of 3.2%. For Poland, the euro is a much more useful currency than the yuan when it comes to international transactions. The yield on yuan-denominated bonds is also much higher than the interest on the debt that the Polish government could have taken out in euros. Therefore, at the same time as the bonds were issued, a swap contract was concluded, under which the currency and interest rate were swapped for their euro equivalents, with a final negative yield of -0.104%. This also limited the foreign exchange risk. The mechanism of the transaction was practically the same as that of the first issue in 2016, which was concluded in 2019.
We should emphasise that the effect of this issue on Polish public debt is negligible. This single issue of panda bonds is of practically no significance in terms of China’s role as Poland’s creditor and its potential influence over the Polish financial market. The value of the issue was only a small fraction of Poland’s government debt, which in July amounted to 1.135tn PLN ($276bn).Compared to the overall debt of the public finance sector – and even more of one adds the hidden debt pushed onto institutions such as Bank Gospodarstwa Krajowego, a state-owned development bank – the amount of the bond issue is thus a drop in the ocean. It is also a marginal amount in relation to Poland’s foreign debt, which totalled approximately $68bn in July.
Unclear financial benefits
An issue touched upon in many comments in relation to the benefits of the swap transaction was the negative yield on the issue of the bonds. However, the Polish government could probably have obtained a similar interest rate with a regular issue of euro-denominated foreign bonds. Euro-denominated five-year foreign zero-coupon bonds issued in February of last year had a negative interest rate of just over -0.1%. The yield on euro-denominated three-year bonds issued on the Polish domestic market in July of last year was -0.11%.
These euro-denominated bond issues were implemented last year, which means they cannot be treated as a simple benchmark for the issue conducted in China. However, since their execution, there have been no events that would significantly alter the situation. None of the foremost agencies has lowered Poland’s rating, and the European Central Bank has not raised interest rates in the last two years. The ECB’s valuation of three-year government bonds within the euro area in September 2021 was -0.43%, although it should be pointed out here that there was a certain noticeable increase in yield in the first few days of October due to an increase in oil prices.
Debt diversification and the issue of securities in a greater number of currencies is beneficial. However, the timing is somewhat puzzling. If the Polish government was of the opinion that issuing bonds in China might be financially beneficial, why did they not increase exposure on the Chinese market in preceding years? Bonds from the previous issue were repaid in 2019, and the Ministry of Finance has only now decided to continue. We can look for clues in other countries.
Bonds as an expression of international friendship
Panda bonds are mainly used by foreign companies, financial institutions and international organisations active in China for the purpose of financing local operations. In March, the Asian Development Bank issued five-year bonds worth a total of 2bn CNY ($314m), with an annual coupon rate of 3.2%, for the purpose of facilitating operations in China. Also in March, Deutsche Bank issued bonds on behalf of the New Development Bank, established by BRICS (Brazil, Russia, India, China and South Africa). The value of panda bonds in circulation at the end of 2020 amounted to $40bn, which accounted for about 0.22% of the entire bond market.
Such a small share is caused by several factors: the considerable difficulty of using obtained funds outside of China, requirements imposed on issuers, and a significantly higher interest rate than in the case of issues in US dollars or euros. The CCP’s leadership wishes to increase the value of the panda bond market, seeing it as one of the ways (by no means the most important one) in which it might promote the role of Chinese currency on international financial markets.
However, issuing such shares is much less attractive to foreign governments than it is for entities operating in China. For those governments that do not conduct transactions in yuan, and have a relatively good rating and the option to take out beneficial loans in other currencies (such as Poland), issuing of these bonds only becomes a financially viable option once they have implemented additional operations such as the aforementioned swap. For China’s part, this kind of operation comes with costs and increased risk. It is no surprise, then, that there is limited engagement on the part of foreign countries and local administrations in relation to panda bonds, with the value of bonds issued at the end of 2020 amounting to less than $3.3bn.
Many commentators’ interpretation of the issue of government panda bonds solely in financial terms while ignoring the political factor is somewhat surprising. China is using this transaction, which is of rather little financial benefit, as a tool to both help internationalise the financial market and form political ties with the countries issuing the bonds.
The list of countries issuing such bonds primarily includes those states that have been seeking to form closer political relations with China, including in relation to attempts to obtain various economic benefits. In the years 2018-2019, the Philippines obtained a total of approximately 4bn CNY; Hungary in 2017 – 1bn, and in 2018 – 2bn; South Korea – 3bn in 2015, before the THAAD dispute. In 2020 there were no significant transactions initiated by foreign governments. Issues of panda bonds, even if they provide financial benefits, are still also – and perhaps primarily – a political gesture and an indication of a willingness to cooperate.
If in doubt, it’s about politics…
Bearing in mind that the Polish bonds were issued in China, and the decision to do so was taken amidst a dispute with the EU and tense transatlantic relations, it is hard to believe that political factors were not also at play.
In the weeks preceding the issue of the bonds, tensions intensified between the Polish government and the EU authorities in relation to the failure of politicians and policy-makers from Poland’s United Right — the ruling coalition led by the Law and Justice (Prawo i Sprawiedliwość, PiS) party — to adhere to the principle of the rule of law, as well as due to a dispute concerning the place of EU law within the Polish legal system. The possibility of Poland’s access to funds from the EU’s Recovery and Resilience Facility being blocked or delayed became more likely.
Several days before the issue of the bonds, while attending the Kongres 590 event, the Governor of the National Bank of Poland (NBP) commented on the potential withholding of EU funds: “We can take out whatever loans we wish. Anyone will give us one. We’re not taking out any loans at the moment, either as a country or as the National Bank of Poland. None at all. The whole world is coming to us and asking to borrow.” The value of the bonds issued in China is only small, and in terms of the level of need, it’s almost nothing, so essentially that all checks out.
The governor of the NBP is not the Minister for Finance, who manages the issue of foreign bonds, but this kind of statement from the head of Poland’s central bank, taken together with comments from other United Right politicians, adequately reflects the position of the ruling party. The Hungarian authorities, led by President Orbán, are of a similar opinion. Like Warsaw, Budapest also has problems with mobilising funds for the National Recovery Plan. In response to the EU’s decision to withhold funds, in September the Hungarian government issued bonds worth $4.25bn and €1bn.
In light of these actions, the few hundred million euros borrowed by Poland in China is a relatively small sum that would be of little importance if not for the fact that it is another of several signals provided over the past few months by Warsaw that it wishes to form closer ties with Beijing.
A second attempt at closer Poland-China relations?
The first Polish panda bonds entered the Chinese market in August 2016, and Poland was the first European country to issue them. The transaction was carried out two months after the CCP General Secretary and PRC Chairman, Xi Jinping, visited Poland. The issue of the bonds was one element of a strong warming of relations with Beijing, implemented by the government of Prime Minister Beata Szydło and President Andrzej Duda, who visited China in November 2015. Further, in May 2017, Poland was one of just a few European states to be represented by a head of government during the Belt and Road Forum for International Cooperation held in China. This was a honeymoon period in Poland’s relations with China.
Amid growing tensions with the EU institutions and certain member states in relation to, among other things, the rule of law and changes that have been made to the functioning of Poland’s Constitutional Tribunal, the Polish authorities attempted to improve their international standing by strengthening the country’s relations with countries outside the EU. Beijing was treated as a major partner in this regard, and Warsaw simultaneously expected an increase in Polish exports, direct Chinese investments and China’s participation in and funding of investment projects.
The feeble effects of economic cooperation with China and, above all, the conflict between Beijing and Washington under Donald Trump’s administration caused Poland-China relations to cool. Good relations with the US were the higher priority.
However, Joe Biden’s election as president and the current and intensifying conflict with the EU institutions has again left the Polish government with increasingly fewer friendly partners. Unfortunately, it seems that the United Right government is attempting to improve its position by strengthening relations with China’s communist regime.
In February, President Andrzej Duda took part in the online 17+1 Summit. In May, the head of the Polish Ministry of Foreign Affairs, Zbigniew Rau, visited China to consult with his counterpart, Wang Yi, on further work under the 17+1 initiative and on the future of EU-China relations. In July, Minister for Infrastructure Andrzej Adamczyk encouraged his Chinese counterparts and companies from China to engage in the area of transport and infrastructure projects. Another significant gesture in this sequence is the issue of bonds in China. It is worth pointing out, however, that actions on both sides have thus far been cautious and have not translated into broader, effective cooperation. We are still a long way from the “honeymoon years” of 2015-2017.
The two countries’ relations could also be impacted by the Huawei issue. Since January of this year, proceedings related to the act on the national cybersecurity system have been put on hold by the Council of Ministers. Also, the recently amended draft does not establish human rights violations in the equipment supplier’s country of origin as grounds to exclude said supplier (as proposed in the initial text). In the meantime, the assessment mechanisms contained within the draft still allow for the exclusion of the Chinese company from equipment deliveries and participation in the development of 5G infrastructure. The draft act may yet be repeatedly amended during the legislative process, and another issue that hinders predictions of its effects is the manner of its implementation once it enters into force.
The now former Minister for Foreign Affairs, Jacek Czaputowicz, recently commented that he “cannot think of anyone” abroad who likes the current Polish administration. Let us hope that the Polish government will look for friends in places other than Beijing in future.
Translated by John McCarthy for Sinopsis.
Łukasz Sarek is a researcher and China market analyst. He writes about China-Europe economic relations with focus on Poland and CEE.
Łukasz Sarek, “5G and the Internet of Things: Chinese companies’ inroads into ‘digital Poland’”, 3rd Jan. 2020.
—, “Arresting Huawei’s march in Warsaw”, 2nd Feb. 2019.
—, “Chinese FDI in Poland: Still just wishful thinking”, 25th Aug. 2018.