China is considering allowing qualified foreign governments to issue yuan-denominated bonds, Finance Minister Xie Xuren said on Saturday. The intention follows the announcement in March that China would allow foreign companies to issue yuan-denominated bonds. So far, these plans are still waiting to be materialized.  
The International Finance Corporation, the private sector arm of the World Bank, and Asian Development Bank issued a combined $287.8 million yuan-denominated bonds in 2005. This was the first yuan-denominated bonds issued by non-Chinese institutions, also called Panda bonds, and it remains the only such issuance.More Panda bonds by different foreign entities would bring more variety to China’s bond market and provide investors additional alternatives. The participation of foreign bond issuers could help establish confidence and trust in China’s capital market by the introduction and adoption of international standard of pricing, underwriting, disclosure and documentation. 
Panda bond has its limitations, however. The underwriters have been domestic firms and the bonds were traded only on the domestic interbank market. Foreign institutions must invest the proceeds of the bond sales inside China, and cannot transfer them outside. Moreover, the size of the Panda bond can almost be ignored when comparing with other types of bonds.

 

These limitations are that of the general market condition, of course. As China plans to gradually reform yuan exchange rate, open market access and allow foreign participation, the transition of China’s financial market might be in sight, if everything goes as planned.