BCMXY Bank of Communications Company Ltd (PK)

South Korea's government is set to become the first sovereign issuer of a yuan-denominated bond in China's onshore markets in the coming week, the latest sign of the growing acceptance of the Chinese currency in international markets.

The move is the latest effort to boost financial ties between South Korea and China, its biggest trading partner. South Korea's stock exchange also said Friday it would research a plan to link trading with its Shanghai counterpart.

The so-called panda bond issuance is expected to be completed Tuesday and will serve as a pricing reference for future sales of debt by Korean corporations in China, said Heenam Choi, deputy minister for international affairs at the South Korean ministry of strategy and finance.

"It will provide a benchmark to the next issuers from Korea. We hope this will clear the way for them," he said.

The deal comes after the International Monetary Fund late last month approved the inclusion of the Chinese yuan in the basket of currencies backing its special drawing rights.

South Korea's government met with investors this week in Shanghai and Beijing to tap the Chinese market with a three billion yuan ($465 million) three-year bond. Citibank, HSBC, Standard Chartered, Goldman Sachs and Bank of Communications have roles on the deal.

Separately, Korea Exchange said it had agreed to study a plan to link its stock and bond markets with the Shanghai Stock Exchange.

"The Korea and Shanghai stock exchanges agreed to research to link stock and bond trading as a longer term project," Korea Exchange said in a statement.

The move follows similar steps by Hong Kong, which opened a trading link with Shanghai in November last year. Deutsche Bö rse last month launched a trading venue for yuan-denominated securities in Europe, while London is studying plans for a similar link.

Panda bonds are yuan-denominated debt instruments issued in the onshore Chinese fixed-income markets by a foreign entity.

Over the past few years, foreign companies and governments have sought to tap the so-called dim sum market, issuing offshore yuan-denominated bonds in Hong Kong. Opening onshore markets has proven more slow, owing to tight restrictions on the Chinese currency which have become looser during the past few years.

The first panda bonds were issued by the International Finance Corp. and the Asian Development Bank in 2005, but only a handful of transactions have taken place since then. A total of $1.8 billion has been raised in the panda-bond market, according to Dealogic data. Most of this issuance has come in the past two years from companies such as HSBC Holdings PLC, Standard Chartered PLC and Mercedes owner Daimler AG of Germany.

South Korea's economic links with China will likely grow further as a recently signed free-trade agreement between the two countries comes into effect, said Ken Hu, chief investment officer for fixed income, Asia-Pacific, at Invesco Ltd, which manages $791.1 billion of assets.

"As their trades are increasingly settled in yuan, we expect their cross-border investments and financing will also [be mostly] in yuan," he said. Because of its trade links, South Korea could in time become a key member of a yuan bloc in which the currency is used for both trade and financing, Mr. Hu said.

Other government issuers are also seeking access to this market. British Columbia is also seeking to issue a panda bond, receiving approval from the Chinese government for a six billion yuan panda bond program last week.

South Korea's panda bond sale comes as the yuan steadily weakens against the U.S. dollar, with the People's Bank of China's official reference rate—which determines the level at which the currency can trade—depreciating during the past five days, hitting a four-year low.

Min Sun Lee in Seoul contributed to this article

Write to Gregor Stuart Hunter at gregor.hunter@wsj.com

(END) Dow Jones Newswires

December 11, 2015 07:35 ET (12:35 GMT)

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