Poland becomes first European state to issue RMB bond

Poland has become the first European country to issue government debt in China’s bond market, with a bond of 3 billion yuan ($452 million), a move which analysts said marks a significant milestone for the yuan’s growing use internationally.

The three-year bond has a yield of 3.4 percent. Bank of China Co Ltd and HSBC Holdings Plc are joint bookrunners and joint lead underwriters. The bond issuance comes ahead of the yuan’s imminent 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 that the yuan will join in October to sit alongside the dollar, euro, sterling and yen. It is the major alternative currency to the dollar, which dominates international foreign exchange transactions.

Issuance of the so-called panda bonds, which are yuan-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 Ratings Inc. So far most issuers have been international financial institutions.

“This transaction marks another milestone in the rapid integration of the Chinese market into the global marketplace. It forms part of the preparation for China’s accession to the global reserve currency system,” said Jan Dehn, head of research at Londonbased Ashmore Investment Management Ltd.

Dehn said such sovereign debt tended to be issued in order to meet a specific market demand for the yuan, typically coming from corporations that needed yuan assets for hedging purposes.

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

At the same time, increasing issuance of yuan-denominated bonds helps China to populate its yuan yield curve, “a desirable piece of financial infrastructure for any country with the ambition of becoming a global reserve currency”, Dehn said.

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