Polish company Action at a food fair in Shanghai in May.[Photo provided to China Daily]

Poland has become the first European country to issue government debt into China's mainland bond market, with a bond of 3 billion yuan ($452 million), marking a significant milestone for renminbi's growing use internationally, which builds towards its reserve currency status.

The three-year bond has a yield of 3.4 percent. Bank of China and HSBC are joint book-runners and joint lead underwriters. The bond issuance came against the context of renminbi's imminent inclusion in the International Monetary Fund's basket of special drawing rights currencies in October.

The IMF's SDR is an international reserve asset, in the form of a currency basket which the renminbi will join in October to sit alongside the dollar, euro, sterling and yen. It is the major alternative currency to the US dollar, which dominates international foreign exchange transactions.

Issuance of so-called panda bonds, which are renminbi-denominated onshore Chinese debt issued by foreign entities, was first permitted in 2005. As of March 2016, the outstanding amount of panda bonds was only $2.57 billion, according to the ratings agency Fitch. So far most issuers in the past have been international financial institutions.

"This transaction marks another milestone in the rapid integration of Chinese markets into the global market place. It forms part of the preparation for China's accession to the global reserve currency system, the SDR," said Jan Dehn, head of research at the London-based Ashmore Investment Management.

Dehn said such sovereign issues tends to happen in order to meet a specific market demand for the renminbi currency typically coming from corporates that need RMB assets for hedging purposes.

"China is now a hugely dominant trading nation and as RMB has naturally become more flexible as part of SDR inclusion both financial and non-financial corporates that transact with China will naturally have greater hedging needs," said Dehn.

At the same time, increasing issuance in RMB bonds helps China to populate its RMB yield curve, "a desirable piece of financial infrastructure for any country with the ambition of becoming a global reserve currency," Dehn said.

Miranda Carr, senior analyst at Haitong Securities in London, said the bond issuance follows the footsteps of a growing amount of renminbi bonds issued by foreign entities, and this trend is expected to grow as more institutional investors diversify their foreign exchange holdings into the renminbi after the SDR inclusion.

"Because the renminbi's percentage share allocation in the basket of SDR currencies is 10.92percent, we'd expect more and more international central banks and other financial institutions to increase their renminbi allocation in the longer term, so the issuance of panda bonds would help grow this market," said Carr.

Christian Cornett, corporate partner at the law firm King & Wood Mallesons, said the bond's issue by a sovereign illustrates the "ever increasing range of RMB denominated bonds".

"In line with recent market developments, we expect an increasing diversification and even broader range of RMB denominated bonds going forward," Cornett said.

Ulrik Ross, global head of public sector debt capital markets and sustainable financing at HSBC said the issue allows Poland to diversify its funding sources, it gives Chinese investors an opportunity to diversify their portfolios and it demonstrates the growing importance of the RMB as a global investment currency.

"The transaction is a milestone in creating better links between Polish and Chinese financial markets, which should encourage increased cooperation between financial institutions from both countries," Ross said.

To contact the reporter: cecily.liu@mail.chinadailyuk.com