Poland issues RMB debt in China

Bond marks a milestone for the renminbi's international use and a precursor to the upcoming accession to the global reserve currency system

Poland has become the first European country to issue government debt in China's mainland bond market. The bond, for 3 billion yuan ($450 million; 399 million euros), marks a significant milestone for the renminbi's growing international use, which builds toward its reserve currency status.

The three-year bond has a yield of 3.4 percent. Bank of China and HSBC are joint book-runners and joint lead underwriters. The bond issuance comes against the context of the renminbi's inclusion in the International Monetary Fund's basket of special drawing rights currencies in October.

The IMF's SDR is an international reserve asset, in the form of a currency basket the renminbi will join in October to sit alongside the dollar, euro, sterling and yen. It is a major alternative currency to the US dollar, which dominates international foreign exchange transactions.

Issuance of so-called panda bonds, which are renminbi-denominated onshore Chinese debt issued by foreign entities, was first permitted in 2005. As of March 2016, the outstanding amount of panda bonds was only $2.57 billion, according to the ratings agency Fitch. Most issuers have been international financial institutions.

"This transaction marks another milestone in the rapid integration of Chinese markets into the global marketplace. It forms part of the preparation for China's accession to the global reserve currency system, the SDR," says Jan Dehn, head of research at London-based Ashmore Investment Management.

Dehn says such sovereign issues tend to happen in order to meet a specific market demand for the renminbi currency, typically coming from corporations that need RMB assets for hedging purposes.

"China is now a hugely dominant trading nation and as RMB has naturally become more flexible as part of SDR inclusion, both financial and nonfinancial corporates that transact with China will naturally have greater hedging needs," Dehn says.

At the same time, increasing issuance in RMB bonds helps China to populate its RMB yield curve, "a desirable piece of financial infrastructure for any country with the ambition of becoming a global reserve currency," Dehn says.

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates, according to Investopedia.

Miranda Carr, senior analyst at Haitong Securities in London, says the bond issuance follows the footsteps of a growing amount of renminbi bonds issued by foreign entities, and this trend is expected to grow as more institutional investors diversify their foreign exchange holdings into the renminbi after the SDR inclusion.

"Because the renminbi's percentage share allocation in the basket of SDR currencies is 10.92 percent, we'd expect more and more international central banks and other financial institutions to increase their renminbi allocation in the longer term, so the issuance of panda bonds would help grow this market," Carr says.

Christian Cornett, corporate partner at the law firm King & Wood Mallesons, says the bond's issue by a sovereign illustrates the "ever increasing range of RMB-denominated bonds".

"In line with recent market developments, we expect an increasing diversification and even broader range of RMB-denominated bonds," Cornett says.

Ulrik Ross, global head of public sector debt, capital markets and sustainable financing at HSBC, says the issue allows Poland to diversify its funding sources. It also gives Chinese investors an opportunity to diversify their portfolios and demonstrates the growing importance of the RMB as a global investment currency.

"The transaction is a milestone in creating better links between Polish and Chinese financial markets, which should encourage increased cooperation between financial institutions from both countries," Ross says.

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