As the yuan takes further steps to become a global currency, the ways in which Chinese and foreign governments, banks, and corporations plan to use the currency are becoming clearer.
The bond market received a jolt recently, as South Korea declared it would become the first sovereign issuer of yuan-denominated bonds—also known as panda bonds—in China’s onshore financial markets. The three billion yuan ($465 million), three-year bond could close as soon as Tuesday, Dec. 15.
The announcement comes two weeks after the International Monetary Fund (IMF) decided to include the Chinese yuan in the basket of reserve currencies backing its special drawing rights.
Korea Dives In
South Korean government officials marketed the bonds to Chinese investors in Shanghai and Beijing this month. “The Korea and Shanghai stock exchanges agreed to research to link stock and bond trading as a longer term project,” according to the Korea Exchange in a statement.
Korean officials say that the issuance should serve as a pricing benchmark for Korean companies looking to issue debt in China going forward. China is South Korea’s single biggest trading partner.
Other governments are also close to issuing panda bonds. Canadian province British Columbia—home to half a million ethnic Chinese—is also contemplating onshore Chinese bonds. The province received Beijing’s approval for up to a six billion yuan issuance.
Financial Institutions Take Lead
The International Finance Corp., which is a unit of the World Bank, and Asian Development Bank issued the first panda bonds in 2005, raising a combined 2.2 billion yuan ($350 million).
China’s $6.8 trillion onshore bond market—the world’s third largest behind the United States and Japan—could be an important funding source for banks and companies doing business in China.
But bond issuances have been muted, with a total of $1.8 billion raised in the panda bond market to date, according to Dealogic, a financial software company. Outside of those international financial institutions, German automaker Daimler AG was the only other issuer, with a 500 million yuan private placement in 2014.
