Feasibility Study Report on Panda Bond Issuance for the PNG Economic Special Development Zone

1.1 Project Background

Papua New Guinea is a major island nation in the western South Pacific, with a population of approximately 10 million. It possesses world-class oil, gas, mineral, forest and fishery resources and is an important member of the "Global South". For a long time, PNG has faced a huge financing gap for infrastructure development, and traditional financing channels (USD external debt, multilateral institution lending) can no longer fully meet its needs. There is an urgent need to open up low-cost, sustainable new financing pathways.

2026 marks the 50th anniversary of the establishment of diplomatic relations between China and PNG. The two countries have established a comprehensive strategic partnership, and Belt and Road cooperation continues to deepen. In February 2026, the Chairman of the Export-Import Bank of China held working talks with PNG's Deputy Prime Minister and other senior officials, at which "RMB business cooperation" was explicitly mentioned for the first time at the official level. In March 2026, Phase II of the PNG National Grid project, financed by the Export-Import Bank of China, was successfully completed. Bilateral financial cooperation is upgrading from "project finance" to "capital market cooperation", creating a historic opportunity for PNG sovereign entities to enter the Chinese bond market.

Against this background, the Administrative Committee of the PNG Economic Special Development Zone (Party A) has commissioned Vastgold Enterprise Holding Limited (Party B) to lead, with Guangdong Qiyuan Engineering Management Co., Ltd. (Party C) in support, the issuance of RMB Panda Bonds in China on the basis of "national sovereign guarantee + sovereign fund issuer". The proceeds will be used exclusively for the Zone's "Nine Utilities and Site Leveling" and infrastructure construction, promoting PNG's strategic transformation from a "resource nation" to a "capital nation".

1.2 Key Project Parameters

1.3 Basis of Preparation

The report is based on:

1. The tripartite Cooperation Agreement (PNG Economic Special Development Zone Panda Bond Issuance Project, Agreement No. VG-PNG-2026-001, signed April 12, 2026);
2. Minutes of the April 7, 2026 meeting between Vastgold and the party of Chairman Lu on the Panda Bond issuance cooperation plan;
3. Minutes of the April 11, 2026 PNG Development Zone project working meeting (cooperation framework, execution of authorization documents, and Panda Bond promotion plan);
4. Minutes of the second April 12, 2026 PNG Development Zone project working meeting (repositioning of the cooperation model, formation of the working committee, and the three-tranche funding plan);
5. "PNG Panda Bond Cooperation Discussion Minutes and Background Analysis" (April 13, 2026);
6. PNG national economic data, Chinese Panda Bond market data, regulatory policy documents and public market cases (as of April 2026).

1.4 Scope and Methodology

The report adopts a methodology of "document analysis + benchmarking + structural calculation + risk matrix": the tripartite agreement and meeting minutes define the project framework and boundaries; Chinese Panda Bond market data and regulatory policy assess the issuance environment; sovereign and sovereign-related issuance cases in Egypt, Pakistan, Brazil, Kazakhstan and Indonesia benchmark the project structure; debt-servicing capacity is measured across three layers — national credit, resource assets and cash flow; and a risk matrix identifies and tiers the project risks for management.

1.5 Summary of Core Conclusions

3.1 Panda Bond Concept and Market Evolution

Panda Bonds are RMB-denominated bonds issued in China's interbank or exchange bond markets by offshore institutions (including foreign governments and their agencies, international development institutions, offshore financial institutions and non-financial corporates). Since the first issue in 2005, the Panda Bond market has passed through four stages — initial exploration (2005–2013), relaunch and expansion (2014–2018), rule refinement (2019–2023) and explosive growth (2024 to date). Issuers have expanded from international development institutions to sovereign states, financial institutions and multinational corporates, making Panda Bonds one of the core vehicles of RMB internationalization.

As of end-March 2026, outstanding Panda Bonds stood at RMB 476.178 billion, up 35.54% year-on-year. Bank of China, the market leader, has topped the Panda Bond underwriting rankings for twelve consecutive years, having assisted more than 80 quality offshore clients in issuing over 350 Panda Bonds with a total size exceeding RMB 700 billion, covering five continents (Europe, North America, Africa, South America and Central Asia). Of these, Bank of China has participated as lead underwriter in 19 sovereign Panda Bonds, covering 90% of offshore sovereign issuers — a powerful institutional endorsement for this project, for which Bank of China is the proposed lead underwriter.

3.2 Explosive Market Growth in 2026

In Q1 2026, the Panda Bond market grew explosively: total issuance reached RMB 88.235 billion, up 101.45% year-on-year — an all-time record for the quarter. Market momentum extended the uptrend of 2025: issuance pace has accelerated markedly, issuers are increasingly diverse, and sovereign issuers, multilateral development institutions and multinational corporates compete on the same stage.

Key drivers of market heat include:

1. Significant cost advantage: onshore financing costs are below offshore; Panda Bond coupons are generally in the low 1.94%–2.51% range;
2. Policy dividend release: regulators have simplified the registration process, optimized fund-usage rules, and granted tax preferences on interest income to offshore institutional investors;
3. Rising attractiveness of RMB assets: global investors are increasing RMB allocations; the RMB has remained stable-to-strong against the USD, improving the value proposition of RMB-denominated issuance;
4. Diversification of issuers: new issuer types such as emerging-market sovereigns and sovereign wealth funds are entering in force, creating a demonstration effect.

3.3 Interest-Rate Environment and Financing Cost Advantage

The China–US interest-rate differential remains persistently inverted, making onshore RMB financing costs significantly lower than offshore USD financing. In 2026, Panda Bond coupons have concentrated in the 1.94%–2.51% range, while comparable USD debt and offshore sovereign bonds are substantially more expensive. On the basis of this project's USD 500 million (RMB 3.5 billion) issue size:

• Issuing at a RMB coupon of 2.5%–3.0% versus USD financing at 5.5%–6.0% would save approximately USD 15–17.5 million in interest per year (a 100–200 basis point spread dividend);
• Cumulative savings over the 3-year tenor: approximately USD 45–52.5 million;
• Should the RMB appreciate against the USD over the medium term, the real debt-service burden would decline further.

Strategic conclusion: the present time is favorable for using the international capital market window to issue Panda Bonds. For PNG, this effectively optimizes the debt structure and lowers the overall financing cost.

3.4 Regulatory and Policy Framework

The main regulators and rules governing Panda Bond issuance are as follows:

Points requiring specific note:

1. The quota is decisive: the PBOC controls quota, not interest rates. Issuance quota is a scarce resource, and sovereign-guaranteed projects have a materially higher certainty of approval;
2. Registration efficiency: since the DFI (multi-variety unified registration) model took effect in 2021, quality issuers can achieve "one registration, multiple issuances", providing institutional convenience for rolling issuance (short-term rollover into longer tenors);
3. Outbound fund arrangements: the RMB proceeds are delivered as offshore RMB for use in offshore infrastructure payments through a compliant channel; if part of the funds needs to be converted to USD, this must be stated in the application documents before issuance, and the PBOC releases it against the approved quota, fully traceable throughout;
4. Green / sustainability bonds: PNG could allocate proceeds to green infrastructure (hydropower, solar, climate-resilient facilities), enjoying the dedicated facilitation and market premium of green Panda Bonds — Brazil's Suzano green Panda Bond and Pakistan's sustainability bond are successful precedents.

3.5 Comparable Case Studies

Key lessons from the cases:

1. Sovereign + enhancement is the key to breaking through: Pakistan, with sub-B sovereign credit, achieved an AAA issue rating, over 5x subscription and a 2.5% coupon on the strength of an unconditional and irrevocable partial guarantee from AIIB and ADB (covering 95% of principal and interest) — proving that international multilateral guarantees (or sovereign guarantees) can significantly raise the credit grade and lower issuance cost. This project is underpinned by the PNG Ministry of Finance sovereign guarantee + resource asset counter-guarantee — structurally comparable and, on the terms, superior (a full national sovereign guarantee).
2. The sovereign fund issuer model is viable: Kazakhstan's Samruk-Kazyna issuance shows that a state-controlled fund as issuer is accepted by both the market and regulators, providing a direct precedent for the PNG "sovereign fund issuer" design.
3. Bank of China's market position: multiple first-of-a-kind issuances above were led by (or included) Bank of China; its underwriting network, regulatory communication capability and sovereign project experience are important safeguards for the delivery of this project.
4. Green/sustainable positioning adds value: tying use of proceeds to green infrastructure and sustainable development goals improves market acceptance and broadens the investor base.

5.1 Establishment of the Issuer (Sovereign Fund)

Technical conclusion: the Zone Administrative Committee is an administrative body without independent legal personality, cannot bear its own profits and losses, and cannot directly apply as the bond issuer. After multi-party deliberation, the project adopts the "sovereign fund as issuer" plan:

1. Led by Party A, and in accordance with PNG laws and regulations, a sovereign fund (state-controlled fund) is registered and established in PNG, with all equity vested in the PNG Ministry of Finance and no individual shareholding;
2. At the financial-regulatory level, the sovereign fund is not subject to operating-history or track-record requirements — only the Finance Minister's signature and the sovereign guarantee instrument are needed to satisfy issuer compliance, saving substantial time and document-preparation cost;
3. The sovereign fund's credit foundation is the national sovereign guarantee, circumventing the Zone's lack of financial statements and audit history — "one sovereign guarantee solves everything";
4. After incorporation, the fund completes its board governance structure (see Section 4.4) and opens onshore and offshore accounts in parallel.

Alternative and supplementary plan: if establishing a subsidiary company directly under the Ministry of Finance proves procedurally complex (requiring approval through the whole chain of embassy, Prime Minister's Office, Ministry of Foreign Affairs, Prime Minister and Ministry of Finance), a workaround is available — the Ministry of Finance formally entrusts the Zone by official document as borrower and manager of the Panda Bond proceeds, and the Zone registers a dedicated vehicle such as a "Panda Bond Fund Management Company" locally to receive and manage the funds. The legal relationship between the borrower (the PNG government) and the manager (the Zone) is confirmed by an official letter from the Finance Minister.

5.2 Sovereign Guarantee Arrangement

The sovereign guarantee is the key to approval of this issuance. Key points:

1. Form of guarantee: the PNG Ministry of Finance issues a formal written sovereign guarantee instrument; forms may include national sovereign credit guarantee, gold/goods guarantee, or fiscal revenue guarantee; the type and amount of the guaranteed subject matter and related rights and obligations must be clearly defined, and the instrument must satisfy the requirements of Chinese financial regulators;
2. Milestone: the guarantee instrument must be obtained before the issuance application and submitted with the application package;
3. Legal protection: parliamentary or legislative approval of the necessary acts or resolutions relating to the bond issuance and sovereign fund establishment should be pursued in parallel to ensure full legal compliance of the guarantee and the issuance;
4. Counter-guarantee arrangement: the Zone provides a counter-guarantee for the government borrowing with the 5-million-cubic-meter timber processing base and related resource assets, forming a closed loop of "government guarantee — Zone counter-guarantee — resource cash flow";
5. Front-loaded confirmation: the Finance Minister has already made a clear statement on providing the guarantee, with written correspondence exchanged with Chairman Lu; this report recommends that Party A obtain the original guarantee instrument and notarized translation before filing.

5.3 Issue Size and Tenor

Scalability: once PBOC quota is obtained, flexible phased issuance or add-on tranches are possible if market demand is strong; tranches II and beyond may be issued through other underwriting-qualified banks such as China Construction Bank (possibly via New York or New Zealand branches), achieving multi-bank, multi-tranche, regular financing.

5.4 Pricing and Interest Rate

1. The issuance adopts a private placement (no public roadshow), with the purchase price and related terms determined by direct negotiation between buyers and the underwriting bank;
2. The bond coupon is an agreed interest rate negotiated between the underwriting bank and the issuer — the PBOC controls quota, not interest rates;
3. Pricing benchmark: reference to the prevailing Panda Bond coupon range (1.94%–2.51%) and the spread for same-rated sovereign issuers, taking into account the compression of the credit premium after sovereign-guarantee enhancement;
4. Subscription organization: led by Party B with Party C's support, organizing targeted subscription from qualified onshore institutional investors (bank wealth management, public funds, insurance funds, etc.), targeting oversubscription.

5.5 Issuance Method

Private placement (non-public roadshow) is the established method for this project: buyers negotiate one-on-one with the underwriting bank, eliminating the public roadshow process, with a shorter issuance cycle, stronger controllability and easier information management. After issuance, the bonds may circulate in the interbank market and be opened to offshore investors through the Bond Connect channel.

5.6 Underwriting and Operating Arrangements

Lead underwriter: Bank of China. Rationale:

1. Bank of China has topped the Panda Bond underwriting rankings for twelve consecutive years, assisting over 80 offshore clients in issuing more than 350 bonds totaling over RMB 700 billion, with 90% coverage of offshore sovereign issuers — the "first-choice partner" for offshore Panda Bond issuance;
2. Bank of China has participated in 19 sovereign Panda Bond issues, including Egypt (first in Africa; international development institution guarantee model) and Pakistan (first in South Asia), both comparable to PNG — deep sovereign project experience;
3. The operating entity is Bank of China's Representative Office in PNG / New Zealand Branch (PNG currently has no Chinese commercial bank branch; the New Zealand Branch can perform account and operating functions);
4. Bank of China's PNG Chief Representative Zheng Xiaohong is highly enthusiastic about the project, viewing it as a core performance opportunity for the Representative Office, and can directly drive the lead-underwriting mandate and internal processes;
5. Bank of China's Hong Kong Branch and its securities company can supplement the distribution and settlement channels.

5.7 Credit Rating

China does not recognize the rating conclusions of offshore rating agencies (S&P, Moody's, Fitch, etc.) for onshore bonds. The rating for this Panda Bond will be conducted by a qualified onshore rating agency commissioned by the underwriting bank (e.g. China Chengxin International Credit Rating Co., Ltd., a major agency within the PBOC system). With sovereign-guarantee enhancement, the issue rating is expected to reach a high AA+ to AAA level (reference: Pakistan achieved an AAA issue rating under the AIIB/ADB partial guarantee), effectively lowering the coupon and broadening the investor base.

5.8 Denomination, Settlement and Use of Proceeds

1. Denomination: issued and denominated in onshore RMB;
2. Settlement: the proceeds are ultimately delivered to Party A in offshore RMB, freely usable by Party A on the international market;
3. Conversion discipline: the three parties commit not to convert the raised offshore RMB into USD on a large scale. This commitment is consistent with the PBOC's foreign-exchange administration orientation (avoiding a repeat of the lesson of Brazil and Argentina, where offshore RMB from currency swaps was converted into USD to repay external debt, impacting foreign-exchange reserves) and is key to obtaining favorable policy quota; paying infrastructure expenditure in RMB is in any case economically rational (conversion to USD would generate exchange losses);
4. Use of proceeds: funds are used exclusively for the Zone's "Nine Utilities and Site Leveling" and infrastructure construction, phased development of the Zone, and sovereign fund operations; all funds are managed under the Zone's fund-utilization plan and are subject to verification by the underwriting bank and regulators;
5. Exchange-rate perspective: the United States is pressuring for RMB appreciation, which favors the issuer (PNG) — RMB appreciation means the real future debt-service cost falls.

5.9 Rolling Issuance (Short-Term Rollover) Mechanism

Given that a single Panda Bond tranche has a limited tenor (generally 3 years, up to 5 years), the project establishes a rolling issuance (short-term rollover) mechanism:

1. Three months before the current bond matures, the three parties jointly launch the process of issuing a successor bond;
2. Party B leads coordination with other underwriting-qualified commercial banks (e.g. China Construction Bank) to issue the successor bond, with proceeds used first to repay the maturing tranche, ensuring long-term stable fund availability;
3. After the first successful issuance through Bank of China, CCB (possibly via New York or New Zealand branches) may be engaged for the second tranche; different banks apply for quota separately, diversifying single-point dependence;
4. Core principle: "what rolls is the currency, not the product" — ensuring no gap between the two tranches (even a single day's gap is unacceptable); the Resource Bank will help resolve fund-bridging issues;
5. The DFI multi-variety unified registration model provides institutional convenience for rolling issuance.

7.1 Policy and Regulatory Risk

7.2 Sovereign Credit Risk

7.3 Legal and Compliance Risk

1. Cross-border legal application: the agreement is governed by Hong Kong law; matters within PNG (sovereign fund establishment, government approvals, Resource Bank registration, labor and employment) are governed by PNG law; Party C's services are governed by Chinese law — a cross-jurisdiction legal team (including attorney Kang Qing) is required for unified review;
2. Validity of the guarantee instrument: the sovereign guarantee must be formally issued by the PNG Ministry of Finance with the necessary domestic approval procedures completed; where necessary, entrenched by parliamentary act;
3. Completeness of authorization documents: the Prime Minister's Office mandate letter, the Finance Minister's letter, official letterhead documents bearing the national emblem, and identity documents must be fully assembled, bilingual (Chinese/English) and notarized/apostilled (as government-level endorsement);
4. Anti-corruption and sanctions compliance: all intermediary and service fees must be documented in writing and auditable, in compliance with China's anti-commercial-bribery law and international sanctions-compliance requirements; no benefit may be transferred to any government official in any individual capacity.

7.4 Interest-Rate and Exchange-Rate Risk

1. Interest-rate risk: if the RMB rate midpoint rises, issuance cost increases — mitigated by locking the window for rapid issuance and using fixed-rate coupons to control uncertainty;
2. Exchange-rate risk: depreciation pressure on the Kina versus the RMB — as the funds are RMB-denominated and used in offshore RMB, the PNG side bears the actual FX exposure; matching RMB income sources in the repayment arrangements (RMB settlement of timber exports to China) is recommended to create a natural hedge;
3. RMB appreciation dividend: under the RMB's medium- to long-term appreciation trend, PNG's real debt-service burden declines — a favorable factor.

7.5 Project Execution Risk

7.6 Reputation and Conflict-of-Interest Risk

1. Compliance boundary of derivatives business: Party B's secondary-market financial activities (e.g. bond derivatives, settlement services) must be fully ring-fenced from the bond proceeds and not written into the agreement with Party A; all secondary-market activities must comply with the securities regulations of mainland China and Hong Kong — this report expressly notes: any derivatives business based on bond holdings must be conducted within a lawful and compliant framework, must not use non-public information, and must not manipulate the market;
2. Disclosure in the agreement: Party B's compensation arrangements with the issuer and its relationships with subscribing institutions should remain transparent to avoid conflict-of-interest questions;
3. Information management: project information is managed under the confidentiality clause, with external communication made uniformly in the name of the Working Committee.

7.7 Consolidated Risk Matrix

9.1 Financing Cost Savings

9.2 Economic Benefits of the Zone

1. Once the RMB 3.5 billion is in place, the Zone's "Nine Utilities and Site Leveling" can start in full, completing primary development of the first 10 km²;
2. Drawing on the experience of Shekou (2.4 km² start-up area with four utilities and site leveling) and Suzhou Industrial Park (8 km² completed within three years), mature land can attract manufacturing, resource processing, logistics and other industries, creating a virtuous cycle of land transfer, tax revenue and employment;
3. Completed infrastructure will significantly raise land values; on conservative assumptions of transferable land ratios and market prices, land value-added gains leave surplus over and above the bond's principal and interest.

9.3 Timber Trade Cash Flow

The third funding track (bulk timber trade LC) provides project start-up cash flow:

• Model: the Zone's leveling timber (initial batches of 30,000–40,000 m³), settled in Hong Kong by letter of credit;
• Cost structure: about USD 140/m³ (log USD 100 + felling USD 35 + short-haul transport USD 4–5);
• Selling price about USD 500/m³; gross margin about USD 300/m³;
• Cycle: roughly 3 months per loop; profits split equally between the two parties; target net profit on the first vessel: USD 1 million;
• Reference model: China Forestry Group's USD 4.8 million LC (ICBC-guaranteed) has validated feasibility.

9.4 Social and Regional Benefits

1. Employment and livelihoods: the Zone's construction and industrial introduction will create substantial local employment; the timber processing base drives employment across the forestry industry chain;
2. Regional demonstration: PNG becomes the first South Pacific country to issue Panda Bonds, driving regional RMB financing cooperation;
3. Strategic significance: contributing to high-quality Belt and Road development and RMB internationalization — a practical step in building a China–PNG community with a shared future;
4. Sustainable development: if a green/sustainability bond structure is adopted (hydropower, solar, climate-resilient infrastructure), environmental and social benefits will be further amplified.

11.1 Feasibility Conclusions

Based on the analysis in this report, the PNG Economic Special Development Zone Panda Bond Issuance Project is overall feasible:

1. Policy-feasible: the PBOC encourages Panda Bond issuance and is actively seeking qualified candidates; sovereign-guaranteed projects enjoy high approval certainty; the registration system and DFI model raise issuance efficiency;
2. Market-feasible: Q1 2026 issuance reached RMB 88.235 billion (+101.45%), coupons are low at 1.94%–2.51%, and sovereign-level issues have repeatedly achieved oversubscription;
3. Structurally feasible: the combination of "sovereign guarantee + sovereign fund issuer + resource counter-guarantee + Zone use of proceeds" benchmarks against successful cases in Egypt, Pakistan and Kazakhstan, with PNG enjoying a superior resource endowment;
4. Financially feasible: financing cost savings of 100–200bp versus USD bonds; the timber base (annual output USD 2.5 billion) and national resource assets provide ample debt-service protection;
5. Execution requires management: the sovereign guarantee instrument, regulatory approval and the political window are the three key variables and must be managed front-loaded per the Chapter 10 plan.

11.2 Key Success Factors

1. The sovereign guarantee instrument must be secured as soon as possible — the precondition for all filing work;
2. Confirmation of Bank of China's lead-underwriting mandate — recommended to complete liaison and obtain a written expression of intent by end-April;
3. Time-window management — with roughly two and a half years remaining in the Prime Minister's term, the "bond issuance + Zone launch" must be completed within two years, with the guarantee, acts and authorization documents legally entrenched;
4. Dual-track operation of the Working Committee and company contracts — government documents proceed through channels under the Committee name; financial and legal documents are executed and signed by the three companies;
5. Front-loaded locking of subscription resources — under the private placement model, locking in intended subscribing institutions in advance is the key to issuance success;
6. Compliance bottom line — cross-border documents, compensation arrangements and secondary-market activities must be fully compliant, with zero tolerance for improper benefit transfer in any form.

11.3 Recommendations and Risk Notes

1. The three parties are recommended to convene a project kick-off meeting before May 2026, clarifying milestone owners, timetable and cost-sharing;
2. Recommend engaging a trilateral (China, PNG, Hong Kong) legal team to complete compliance review of the sovereign guarantee instrument, authorization documents and issuance documents;
3. Recommend evaluating the Pakistan-style "multilateral partial guarantee" model as a backup enhancement option: if the legal form of the PNG sovereign guarantee instrument is questionable, explore introducing AIIB/ADB joint enhancement;
4. Recommend prudent-caliber disclosure of repayment sources in the issuance documents, avoiding over-reliance on a single timber-base assumption;
5. Note: the market data, rating information and cases in this report are as of April 2026; subsequent market changes (interest rates, policy, exchange rates) may affect the issuance window and terms, and dynamic updating during execution is recommended.

1. Tripartite Cooperation Agreement (VG-PNG-2026-001, April 12, 2026);
2. Minutes of the project working meetings of April 7, 11 and 12, 2026;
3. "PNG Panda Bond Cooperation Discussion Minutes and Background Analysis" (April 13, 2026);
4. Public policy documents of the People's Bank of China, the National Association of Financial Market Institutional Investors and the State Administration of Foreign Exchange;
5. Public materials on Bank of China's 2026 Panda Bond underwriting market;
6. Sovereign rating reports on PNG by S&P Global Ratings and Moody's;
7. Public reports on Export-Import Bank of China cooperation with PNG;
8. Public materials of the PNG Ministry of Finance, Ministry of Forestry, Ministry of Trade and the Development Zone;
9. Market data platforms such as ChinaBond (Panda Bond issuance data for Q1 2026).