By Tom Arnold

DUBAI,  (Reuters) - Industrial and Commercial Bank of China is talking to governments and state-linked entities in the Gulf that are interested in issuing yuan-denominated bonds in China, said an executive at ICBC, China's largest bank.

One government entity is in the process of applying to issue such instruments, known as panda bonds, which would make it the first issuer from the Middle East in China's interbank bond market, said Zhou Xiaodong, general manager of ICBC Dubai (Dubai International Financial Centre) branch.

He did not name the entity, but said potential issuers had to have investment-grade credit ratings.

Beijing is encouraging foreign bond issuers as it seeks to internationalise its yuan or renminbi currency and open up sources of finance for its planned "Belt and Road" trade route connecting China by land and sea to Europe.

Meanwhile, Gulf governments and companies have become more eager to issue bonds abroad in the past couple of years as low oil prices cause governments to run budget deficits and tighten liquidity in local banking systems.

"We have discussed renminbi bonds with some potential clients in the Gulf countries, and they are taking it into consideration," Zhou told Reuters.

"The debt market in the Middle East is growing very fast, and while a lot of it is related to U.S. dollar issues, renminbi-denominated bonds are an alternative channel for companies wanting to tap the Chinese market."

ICBC is the biggest market maker in the interbank bond market in China.

Saudi Arabia's Vice Minister of Economy and Planning Mohammed al-Tuwaijri said last week that Riyadh was willing to consider funding itself partly in yuan to cover its budget deficit and finance major investment projects. (Editing by Andrew Torchia)

© Reuters News 2017