Panda bonds reflect stronger Korea-China ties

Panda-bond diplomacy is being used to warm ties in Asia as President Park Geun-hye plans the world’s first yuan-denominated bond offered by a foreign government in China.

The need for yuan funding is rising as Korean companies invest more in China, Song In-chang, the Finance Ministry’s director general, said on Tuesday, without elaborating on when the offering will be. While China’s slowing growth has dragged on shipments of Korean televisions, cars and steel, exports to Asia’s largest economy have expanded an average 44 percent since relations were normalized in 1992, reaching $145 billion last year.

Korea’s offering would also help bolster China’s bid for the International Monetary Fund to include the yuan in a basket of reserve currencies. It got a boost when HSBC Holdings PLC and BOC Hong Kong Holdings sold panda bonds in September. President Park won greater access to China for Korean investors at a weekend meeting
in Seoul with Chinese Premier Li
Keqiang.

“They both need each other badly,” said Chung Chul, an economist at Korea Institute for International Economic Policy based in the administrative capital of Sejong.

“Both countries are seeking bigger economic integration.”

IMF representatives told China the yuan is likely to join the fund’s reserve basket soon, according to Chinese officials last month. The United States softened its stance on the yuan in September and now supports its inclusion in the International Monetary Fund’s basket if it meets existing criteria.

“The Korea panda bond sale is another sign of the opening up of China’s domestic bond market ahead of the IMF decision on the yuan’s reserve currency status expected this month,” said Ji Weijie, credit analyst at China Securities.

China is also opening its market to global funds, raising its quota for Korean investors to buy securities in the country to 120 billion yuan ($19 billion) from 80 billion yuan granted last year. China said it would start direct trading for the won and yuan on the China Foreign Exchange Trade System in Shanghai “at an early date,” Korea’s Finance Ministry said on Oct. 31.

Korean firms seeking yuan have used the market for offshore bonds in the currency outside mainland China. Their issuance of such securities has jumped to 15.3 billion yuan this year from 3.3 billion yuan in all of 2014, led by Export-Import Bank of Korea, according to Bloomberg-compiled data. Kexim, offered 7.2 billion yuan of bonds this year, said Tuesday it’s considering selling its maiden panda notes after the sovereign deal.

Smooth access to the panda bond market can provide a broader fund-raising channel for many Korean issuers as the cost of financing is currently lower in China’s onshore market than the offshore Dim Sum bond market, according to Becky Liu, senior Asia rates strategist at Standard Chartered PLC in Hong Kong.

Korea’s Finance Ministry has hired banks for a foreign- currency bond sale, and the first priority is a panda bond, which may be issued as early as this year, people familiar with the matter said last week, asking not to
be identified because the details are private.

“The planned sale signals cozy relations between Korea and China,” said Hyun Suk, a research fellow in Seoul at Korea Capital Market Institute’s international finance division. “It reflects strengthened economic ties.” Bloomberg