China is expanding the small part of its credit market open to foreign borrowers as it seeks to win global reserve status for its currency.

HSBC Holdings Plc and BOC Hong Kong Holdings Ltd each issued 1 billion yuan ($158 million) of panda bonds last month, taking the number of foreign issuers of onshore notes in the mainland currency to just five since the nation first allowed such securities in 2005. The latest sales come just weeks before the International Monetary Fund (IMF) is expected to decide whether the renminbi meets requirements for inclusion among reserve currencies in its Special Drawing Rights (SDR) basket.

President Xi Jinping is moving to liberalize financial markets to bolster the case that the renminbi is freely usable - one of the IMF's requirements. The People's Bank of China (PBOC) in July made it easier for foreign central banks and sovereign wealth funds to invest in the mainland's credit market. While overseas issuers still account for only 0.02 percent of onshore bonds and foreign investors hold only 1.8 percent of the market, there are signs the steps are paying political dividends. The US softened its stance on the renminbi last month and now supports its inclusion in the IMF's basket if it meets existing criteria.

This "is just sending another signal that China is opening up its capital account, which is part of the requirement for the yuan to be included in the SDR basket", said Yang Zhao, China economist at Nomura Holdings Inc. "In the short term, there won't be much real impact on capital flow."

China must balance greater clout for its currency with steps to prevent sudden flows of capital into or out of the country. The odds that the yuan will win SDR inclusion next month exceed 70 percent, according to China International Capital Corp. It has overtaken Japan's yen to become the fourth-most used currency for global payments. China is committed to making its currency regime more flexible, PBOC Deputy Governor Yi Gang said at an IMF meeting in Peru.

Demand is mounting for renminbi just as a rally in the onshore note market cuts borrowing costs to five-year lows after central bank rate reductions. The 4.67-percent average yield on corporate debentures in China is also lower than the 6.46 percent on offshore renminbi notes known as dim sum bonds, according to Bank of America Merrill Lynch indexes.

The yuan has fallen 1.8 percent against the US dollar this year after an August depreciation. Further drops would reduce the effective cost to foreign borrowers to service the debt.

"The outlook for a renminbi depreciation and the PBOC's accommodative monetary policy is encouraging foreign companies to borrow in yuan," said He Xuanlai, a credit research analyst at Commerzbank AG in Singapore. The outstanding amount of panda bonds may rise to the equivalent of $25 billion in three years from $1.5 billion currently, He said.

The market could top $50 billion in the next five years, according to the World Bank's International Finance Corp (IFC). The IFC plans to sell yuan-denominated bonds as soon as this year after opening the panda securities market in 2005, said Hua Jingdong, vice-president and treasurer, in an interview in Lima on Oct 9. "Once the Chinese yuan becomes part of the SDR, central-bank reserve managers and institutional investors will automatically want to accumulate yuan-denominated assets," Hua said.

HSBC sold its panda securities due in three years at 3.5 percent, and will use the funds to support business outside the Chinese mainland. "China's onshore market offers enormous potential, and the opening-up of the market presents a significant opportunity for both international issuers and Chinese investors," said Alexi Chan, global co-head of debt capital markets at the bank.

(HK Edition 10/13/2015 page8)