News Analysis: S. Korea pushes for Chinese yuan hub with sale of yuan bonds

South Korea plans to sell the Chinese yuan-denominated sovereign bonds for the first time as it pushes to become one of the offshore yuan hubs in Asia, people familiar with the matter said Thursday.

The country's finance ministry picked six arrangers last week for the issuance of the foreign exchange stabilization bond, a sovereign bond floated by the ministry to raise funds for stabilizing its foreign exchange market, said the sources who asked not to be identified as the plan had yet to be officially announced.

Seoul has issued the notes only denominated in the U.S. dollar and euro, the outstanding sales of which were estimated at 4.4 billion U.S. dollars and 1.6 billion euros (1.8 billion U.S. dollars), respectively.

When the ministry sent requests for proposal (RFP) earlier this month to call for potential arrangers to submit the issuance proposals, it said the yuan would be included in candidate currencies for the notes along with the dollar and euro.

It would mark the first issuance by the South Korean government of yuan-denominated bonds, which would help boost the yuan bond sales by South Korean companies and the yuan trading in the local foreign exchange market.

TERMS NOT FIXED

Detailed terms on the issuance haven't been fixed yet as the arrangers are under discussion with the ministry. The government's offering is believed to reach around 3.5 billion yuan (550 million U.S. dollars), roughly the same as 500 million euro worth of the euro-denominated foreign exchange stabilization bonds that will mature in early November.

The yuan-denominated notes to refinance the maturing euro bonds are forecast to be sold within a month in the Chinese mainland, South Korea or China's Hong Kong.

The maturity could become the most-liquid three or five years as it is the first issuance. South Korea's last sales of the foreign exchange stabilization bond happened in June 2014 when the country issued 1 billion dollars of 30-year global bond and 750 million dollars of 10-year euro notes.

A finance ministry official told Xinhua that "nothing has been decided yet at all" on the issuance, but Vice Finance Minister Joo Hyung-Hwan left the possibility for the Chinese currency bond sales open.

Joo told reporters on Wednesday that "a yuan bond issuance is not being ruled out" though the timing and the size haven't been determined yet. He said the government would keep various possibilities in mind.

Possibilities are left open for a mixed offering denominated in both the dollar and the yuan that would delay the issuance to early next year.

OFFSHORE YUAN HUB

In any way, possibility is high for South Korea to issue yuan-denominated sovereign bonds in a foreseeable future as Seoul seeks to become one of the offshore yuan hubs in Asia alongside Hong Kong and Singapore.

Finance Minister Choi Kyung-hwan said in London in June that the South Korean government was "reviewing" the issuance in the second half of this year of yuan bonds "in connection with creating a yuan hub" in the country.

The Bank of Communications, one of China's major commercial banks, was included in the list of six global investment banks selected to arrange the planned sale of the foreign exchange stabilization bonds.

It marked the first time that a Chinese bank was picked to arrange the sale of such bonds, increasing the possibility for yuan bond issuance. The five others were HSBC, Goldman Sachs, Standard Chartered, Citigroup Global Markets and South Korea's Samsung Securities.

Issuing the yuan notes would help prop up South Korea's position as one of the dominant yuan trading hubs in Asia. The government-issued bonds would serve as a benchmark for corporate bonds denominated in the yuan, which would boost the yuan bond sales among South Korean companies.

It would also boost the yuan usage in South Korea's foreign exchange market. Seoul opened a market for direct trading between currencies of South Korea and China in December 2014.

The won-yuan trading volume kept increasing from 0.88 billion dollars in December 2014 to 1.85 billion dollars in March, according to Bank of Korea data. The daily trading between the two currencies more than doubled from 1.39 billion dollars in the first quarter to 3.24 billion dollars in the second quarter. Enditem