MAINLAND CHINA — Deutsche Bank raised 3.5 billion yuan ($518 million) through a three- and five-year panda bond offering in late May. Panda bonds are yuan-denominated bonds sold by overseas issuers in China, and the offering by the bank was oversubscribed.

Panda bond issuance volume increased this year with new sovereign borrowers from Kazakhstan and Pakistan joining global financial institutions and multinational corporations. Morgan Stanley, Volkswagen, and Henkel have also issued panda bonds in China. Issuance reached 26.64 billion yuan in May, marking a monthly record.

China's domestic interest rates are at historically low levels, while the U.S. Federal Reserve maintains higher interest rates for dollar-denominated markets. The financial risk assessment group Moody's Ratings said, "We view the key driver as the interest rate gap: funding in RMB is much cheaper than in U.S. dollars." Moody's estimates that foreign banks issuing panda bonds borrow at rates between 1.7% and 2.2%, while borrowing costs for comparable dollar-denominated instruments range between 4.5% and 5.5%. Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, said, "It's basically the old yen idea. It's cheap funding."

Chinese authorities have adjusted regulations to permit greater flexibility regarding the offshore use of panda bond proceeds. People's Bank of China Governor Pan Gongsheng announced measures that allow overseas central banks and sovereign wealth funds to access yuan liquidity using Chinese bonds as collateral. Garcia Herrero said, "China did not allow the exit of capital [previously]. China is ready now. China does want to internationalize the currency."