German carmaker Mercedes-Benz plans to sell yuan-denominated bonds in the onshore debt market - known as "panda bonds" - mainland state media reported, making the car giant the first non-financial institution to sell such bonds and rekindling hopes of a handful of foreign companies raising funds onshore directly.
The Economic Observer reported yesterday that the firm hired Bank of China last year to work on a deal to raise funds in the mainland's interbank market, without reporting the deal size and its purpose.
It did not say if the funds would be raised through the newly established Shanghai free-trade zone, which gave foreign investors freedom to issue yuan-denominated notes through branches in the zone.
It may not be a good time to issue an onshore yuan-denominated bond, according to HSBC fixed-income analyst Crystal Zhao.
"Seasonal factors might cause offshore rates to jump in late January before Lunar New Year. In the other direction, we expect China's central bank will maintain onshore liquidity to ensure that growth remains on track," Zhao said.
Only the Asian Development Bank, IFC and a few foreign banks have issued panda bonds since China's central bank first allowed foreign issuers to sell them in 2005.
The deal, if true, would come as a surprise to the market because issuing panda bonds costs much more than issuing the offshore yuan-denominated bonds, or dim sum bonds, for corporates.
The 3.95 per cent average yield on dim sum bonds compares to a record 6.29 per cent onshore and the 4.76 per cent for US dollar securities in Asia, according to Bank of America Merrill Lynch indices that track yuan data since 2004.
The spread between onshore and offshore yuan-denominated bond yields had widened to nearly 200 basis points in the second half last year, from an average of 45 basis points in the first half, HSBC data showed.
The seven-day repo rate, a gauge that measures the short-term interbank liquidity in the mainland money market, has remained high as mainland's central bank is maintaining a tight monetary policy to curb inflation amid worries over the shadow banking sector.