South Korean Government And China’s Central Bank Seals Agreement To Set Up Panda Bond

by Czarelli Tuason / Nov 16, 2015 10:05 PM EST

Chinese Yuan. (Photo by China Photos/Getty Images)

The central bank of China has agreed with the South Korean government to establish a direct exchange-trading mechanism between their currencies, yuan and won, in the country's domestic market in efforts to strengthen bilateral financial relation, reported Market Watch Nov. 2.

On Saturday, the People's Bank of China expressed its support to South Korea for being the first sovereign to sell yuan-denominated debt in China as Seoul also facilitates the issuing of bonds of Chinese institutions in South Korea.

According to Bloomberg Nov. 3, yuan funding has increasingly been an essential as South Korean corporations increase their investments in China. Known as the Panda Bond, the agreement will also enable South Korea to expand its foreign currency issuance.

China reportedly agreed to a meeting in Seoul with the country's chairman of the National Development and Reform Commission, Xu Shaoshi and South Korean Finance Minister Choi Kyung Hwan to finalize the Panda Bond plan and Shanghai yuan-won direct trading..

"In order for us to issue debut panda bonds we want to see a more transparent process" in issuance and approval procedures of the Chinese government and central, said Yoon Hee Sung, treasurer of the state-owned lender known as Kexim. "The panda market is a new market and there are a number of hurdles to overcome."

Companies in South Korea have been loaning overseas by selling debt in Hong Kong's Dim Sum market. This resulted to an increase by more than five times from 3.8 billion yuan in 2014 to 3.3 billion yuan this year.

BOC Hong Kong and HSBC has reportedly issued one billion yuan of Panda Bonds in September increasing the number of foreign issuers to five since 2005.

"China aims to promote its onshore bond market and South Korea hopes to participate in the panda market from an early stage," said Yuna Park, a currency and fixed-income analyst at Dongbu Securities Co. in Seoul. "Direct trading in yuan-won has been going on for about a year now and another trading base will open in Shanghai. Onshore yuan bonds will be decent investment avenue for those looking to park their yuan funds."