Free money is something that doesn't really exist. Sadly. Cheap money, on the other hand, does.
For that money to be cheap however, someone else is losing out. But that's their problem. Our reaction should be to say thank you for the cheap money.
This is the same as it is for goods or services in trade. Say that someone out there is subsidizing the production of something. Our reaction should be to buy that cheaper thing. We can say thank you or not as we wish, but we should take advantage of the offer.
For what is actually happening with such a subsidy? The government of that country is taxing its own citizens and giving the money to the producers -- that's the subsidy.
The effect for us is that we get the item cheaper than if that subsidy didn't exist. That subsidy therefore makes us richer. Just as that subsidy makes the people who have to pay the tax to fund the subsidy poorer. They are paying to make us richer.
Which seems very nice of them -- although often enough they've not got much choice in the matter -- and our sensible reaction is to become richer by buying those subsidized goods.
This is true when the item being subsidized is money itself. This is how we should think about Bangladesh's integration into China's Cross-Border Interbank Payment System (CIPS) and the Panda Bond market.
The CIPS part is, well, not controversial. It's useful to be able to pay in China in yuan. People who find that useful will use that system and the rest of us can ignore it all. The Panda Bond market is different, that's very cheap money.
Pakistan just borrowed at 2.5% which -- for Pakistan -- is an extraordinarily low rate. That's also without direct government subsidy, this isn't like the World Bank, or Asian Development Bank. This is a fully commercial loan on standard terms -- and that's a stunningly low price for a borrower of that credit standard.
There is a risk, to be sure. There's always a risk in any financial transaction.
Here it's that the loan is in Chinese yuan (or renminbi) and so there's a foreign exchange risk. What if the yuan changes in value?
After all, we do generally think that the yuan is 20-30% undervalued at present and at some point we expect that to reverse.
On the other hand “at some point” could be many years in the future. But it's a risk to be thought about.
But why is borrowing in yuan so cheap? Especially if there's no government subsidy here?
The answer is something called “financial repression.”
Chinese families save an enormous amount of their incomes. Around 40% of the total each year in fact -- a truly vast figure. The Chinese government limits, very strictly, what can be invested in.
Nearly all of that money ends up in the state-owned banks which pay very low interest rates on those deposits. The aim of this is so that the banks can then lend to the large companies at, again, very low interest rates.
The “repression” is that savers cannot get a proper market return on their savings in order that the banks can then lend at cheap rates.
What this then means is that interest rates in yuan are very much lower than they would be if there was a true free market.
So, it's very cheap to borrow money in yuan at those artificially low interest rates. The people who lose out here are Chinese savers. The people who benefit are those who can borrow cheap money.
So, borrowing by Panda bonds makes us richer -- we get the money we desire cheaper than from other sources. However bad this is for Chinese savers, this is good for us.
But don’t forget, this is also true of other goods and services. If some foreign country is deliberately making things cheap for us by subsidy, or here by strange financial practices, then we should buy them. Things that are cheaper make us richer.
Tim Worstall is a senior fellow at Adam Smith Institute in London.