Panda Bond Financing of the Belt & Road Initiative: An Analysis of Monetary Mechanisms and Financial Risks

ALFREDO SCHCLAREK; JIAJUN XU; PEDRO AMUCHASTEGUI

CABA

Conferencia; LVI Reunión Anual de la Asociación Argentina de Economía Política; 2021

Asociación Argentina de Economía Política

We examine the role of China Development Bank (CDB)?the largest development bank in the world?in the Panda bond financing of the Belt \& Road Initiative (BRI). We investigate the monetary mechanisms and the financial risks involved in the Panda bond financing of the BRI, especially exchange rate risks and balance of payment crisis risks. Our main findings are that the CDB may reduce its financial risks by acting as an underwriter of the Panda bonds rather than as the direct financer, but it may also have to act as a dealer of last resort if there are balance of payment crises and sharp depreciations of the exchange rates in host countries. To reduce the risks of both the exchange rate and balance of payment crisis of the Panda bonds, it is important that the real investment projects are export-enhancing for host countries (generate foreign currency) and that the construction and execution of the real investment projects uses local suppliers based in host countries. The internationalization of Renminbi and the cooperation with the banking systems of host countries are key for reducing foreign exchange reserves outflows.