CNH TRACKER-S.Korea's yuan debt issue bodes well for panda bond pipeline

HONG KONG, Dec 17 (Reuters) - This week featured the first sale of sovereign panda bonds in China’s interbank market. Solid demand for South Korea’s issue and a search for cheaper funding channels are likely to encourage other foreign entities to sell yuan-denominated bonds.

The 3 billion yuan ($463.82 million) three-year bond was priced at 3 percent, the lower end of the 3.0-3.5 percent range. Subscription volumes amounted to 12.8 billion yuan.

“The pricing is quite good and will attract more overseas issuers to the market next year,” a debt capital market banker at an American bank in Hong Kong said.

“Many European and Southeast Asian companies and some governments are consulting with us on the procedures of issuing yuan bonds in China, as it is cheap to raise funds there,” the banker said.

Beijing kicked off the so-called panda bond market in 2005, and World Bank affiliate the International Finance Corp was the first issuer. For years, there were only a handful of bonds, due to limits on issuers and the use of proceeds.

To speed the market’s development, China’s central bank is drafting new rules intended to let more companies issue panda bonds and ease controls on how proceeds are used, sources have told Reuters.

HSBC, Standard Chartered, Bank of China (Hong Kong) and China Merchants Holdings (Hong Kong) have recently sold panda bonds.

In early 2016, the Canadian province of British Columbia is also expected to issue up to 6 billion yuan of bonds in China’s domestic market.

South Korean financial institutions and companies will “gradually switch their funding activities in offshore yuan bond market to China’s onshore market,” Yang Xi, a fixed income analyst at Citic Securities in Beijing, wrote in a report released on Monday.

Korean institutions are active dim sum bond issuers. Even as the yuan bond market in Hong Kong has lost steam this year, their issuance surged to 16.8 billion yuan from less than 3 billion yuan in 2014, according to Yang.

Bankers say it makes sense for foreign entities to raise funds in the onshore market where funding cost has become cheaper than in Hong Kong’s yuan market as China has been in a rate-cut cycle.

On Wednesday, the U.S Federal Reserve hiked interest rates for the first time in nearly a decade, signalling a tentative beginning to a gradual tightening cycle.

For issuers who convert yuan proceeds from panda bonds into U.S. dollars using cross currency swaps (CCS), the elevating dollar/yuan CCS rates in Hong Kong reduce their costs.

The dollar/yuan CCS rates have risen steadily in the past two months and are around their highest in almost four months, thanks to tight liquidity in the offshore yuan market.


* China and the United Arab Emirates (UAE) have renewed their currency swap agreement worth of 35 billion yuan ($5.42 billion) for a further three years, the People’s Bank of China (PBOC) said on Monday. The UAE would also be granted a 50 billion yuan RMB Qualified Foreign Institutional Investor (RQFII) quota.

* China will allow limited convertibility of the yuan in three free trade zones (FTZ) in Guangdong, Fujian and Tianjin, a move further liberalising its capital account after its currency was admitted to the IMF’s reserve basket.

* China will allow non-financial firms in the Shanghai FTZ to freely convert cash raised from overseas debt into yuan, three sources with direct knowledge of the plan said on Wednesday.

* China has begun issuing a yuan exchange rate against a basket of currencies in a move to discourage investors from exclusively tracking the yuan’s fluctuations against the U.S. dollar.


Annual dim sum bond issuance:

RECENT STORIES: Yuan trade settlement under pressure as FX volatility rises China ready to moderate sharp offshore yuan falls -sources

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$1 = 6.4680 Chinese yuan Editing by Richard Borsuk