Mercedes-Benz will launch a yuan-denominated bond in China, according to media reports, becoming the first nonfinancial foreign enterprise to issue yuan debt on the Chinese interbank market.

"Yuan bond issues by nonfinancial overseas enterprises will lead to a more open Chinese capital market" as more issuers raise money in the mainland, said Lian Ping, chief economist of Bank of Communications Ltd.

The Economic Information Daily reported on Tuesday that Bank of China Ltd will be the principal underwriter. Where Mercedes will use the proceeds hasn't been disclosed, but experts said the money is most likely to be spent on domestic projects.

"Although China encourages capital outflows as the government is under a lot of pressure due to capital inflows," said Lian, it would be unusual for an issuer such as Mercedes to raise money in China that would be exchanged for foreign currency to be spent abroad.

For one thing, "the interest rate on yuan-denominated bonds in China is much higher than on US dollar-denominated bonds in another country", said Lian.

Mercedes and Bank of China declined to comment.

In 2005, the People's Bank of China (the central bank), along with the Ministry of Finance, the National Development and Reform Commission and the China Securities Regulatory Commission, issued interim regulations on renminbi-denominated bond issues by international institutions involving development-oriented loans and investment.

That October, the PBOC approved two such issues. The first was by a unit of the World Bank, the International Finance Corp, which sought to issue renminbi-denominated debt totaling 1.13 billion yuan ($186.8 million at current rates) on the nation's interbank market. The Asian Development Bank also got approval to issue bonds worth 1 billion yuan.

The IFC issued further yuan-denominated bonds in 2006, raising 870 million yuan for three projects, and the ADB launched another bond worth 1 billion yuan in 2009.

All the proceeds from these issues went to development projects in the Chinese mainland.

In a revised regulation in 2010, the government said the proceeds of yuan bond issues shall be "first used" - rather than "used" - in domestic construction projects.

"If the money raised is spent on projects overseas, it will become an important step toward the liberalization of the capital and financial accounts in China," said Lian.