South Korea Sells First Sovereign Panda Bonds as China Opens Up

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  • Issues 3 billion yuan of onshore local-currency notes at 3%
  • Sale draws orders for more than four times the amount offered

South Korea became the first foreign country to sell yuan-denominated debt in China’s domestic market, drawing orders for more than four times the amount offered and setting a benchmark as issuance of such securities picks up.

The 3 billion yuan ($464 million) of so-called panda bonds were sold at 3 percent and drew bids of 12.8 billion yuan, according to a statement from South Korea’s Finance Ministry. The sale of the three-year securities furthers China’s efforts to open its capital markets to the world and comes two weeks after the Chinese currency won reserve status at the International Monetary Fund.

“It’s an important milestone for yuan internationalization and will set a benchmark for more issuers,” said Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management LLP, which oversees 4 billion yuan of fixed-income securities. “For domestic investors, it’s a good opportunity to diversify and foreign investors can access the market without having to study credit profiles of onshore issuers. The only problem is that liquidity is not good.”

Setting Benchmark

South Korea’s latest debt offering will provide a reference as foreign borrowers and investors are given greater access to China’s bond market, the third-largest in the world. Overseas central banks, sovereign wealth funds and supranational organizations were all given free access this year as Chinese leaders pushed for the yuan to be included in the IMF’s Special Drawing Rights and issuance of panda notes is starting to pick up.

The purpose of the issuance was to set a benchmark because companies will follow with their own panda bond sales, Finance Ministry Director General Song In Chang said in a phone interview. Most issuances have been in Hong Kong so far, he said, adding that the onshore yields are favorable and liquidity is ample. South Korean companies’ sales of Dim Sum bonds -- yuan-denominated notes issued offshore -- jumped more than seven times to 25.98 billion yuan in 2015, data compiled by Bloomberg show.

More Offerings

While there were only about 10 sales of panda bonds in the 11 years prior to this month, South Korea joins Standard Chartered Plc in becoming the second issuer in December and there are seven more offerings in the pipeline. The Export-Import Bank of Korea is considering selling its maiden panda notes, Treasurer Hee-Sung Yoon said on Nov. 3. Indonesia may issue next year, while the Canadian province of British Columbia has registered to sell 6 billion yuan of such debt.

Standard Chartered issued 1 billion yuan of three-year securities on Dec. 9 at a coupon of 3.5 percent, while HSBC Holdings Plc and Bank of China Hong Kong Holdings Ltd. each offered 1 billion yuan of such debt in October and September at 3.5 percent.

"This landmark sovereign issuance marks the next phase in the opening up of China’s onshore yuan bond market to foreign issuers,” said Alexi Chan, Hong Kong-based global co-head of debt capital markets at HSBC Holdings Plc, referring to Tuesday’s sale. ”The enormous potential of China’s bond markets presents a significant opportunity for both international issuers and onshore investors, and we expect further supply to follow.”

The yield on South Korea’s government bonds maturing December 2018 was 1.74 percent at Tuesday’s close in Seoul, Korea Exchange prices show, while similar-maturity Chinese sovereign debt yields 2.73 percent in Shanghai. Both nations have an AA- credit rating at Standard & Poor’s and are rated Aa3 at Moody’s Investors Service, the fourth-highest ranking.

“South Korea has similar ratings as China, so investors don’t need to worry about risks as it’s government credit,” said Hao Yijun, a senior trader at China Guangfa Bank Co. in Shanghai. “On the other hand, as there are no tax waivers and the market is not liquid, investors may demand some premium.”

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