Korea, 1st Sovereign Issuer of PRC 'Panda' Bonds

In East Asia, China and South Korea have generally gotten along better than either of them with Japan due to the latter's WWII-era imperialism. Nor does China have any major territorial dispute with South Korea--they only have minor tiffs over some rock. It should come as no surprise then that the Koreans are becoming financial innovators in a sense. You see, they will be the first sovereign issuers of yuan-denominated bonds in the mainland. Yes, of course there are already RMB bond issuances by offshore entities--the Asian Development Bank and the (World Bank's) International Finance Corporation come to mind.

But issuance by a sovereign entity? South Korea will be the first:

Korea is poised to become the first sovereign to sell yuan-denominated debt in China, setting a benchmark for companies seeking to expand in the nation’s biggest export market. The need for yuan funding is rising as Korean corporations boost investment in China, Song In Chang, the Finance Ministry’s director general, said in Seoul on Tuesday. The panda bonds will also allow Korea to diversify its foreign-currency issuance, he said.

China wants to increase the yuan’s global use and win its inclusion in the International Monetary Fund’s basket of reserve currencies. It agreed at an Oct. 31 meeting in Seoul between Korean Finance Minister Choi Kyung-hwan and Xu Shaoshi, chairman of the National Development and Reform Commission of China, to back the bond plan as well as direct trading in yuan- won in Shanghai. The Canadian province of British Columbia also said last month it’s in discussions to sell panda debt on the Chinese mainland as it seeks closer business ties with the world’s second-largest economy.

“Local investors have been interested in yuan-denominated bonds, but there were no credible benchmarks,” said Lee Jae-hyung, a fixed-income strategist at Yuanta Securities Korea, in Seoul. A sale by Korea’s government “will be a catalyst for issuance by local companies,” he said.

In effect, it's a trial balloon that, if all goes well, anticipates Korean multinationals also issuing panda bonds to fund their PRC-based operations.