Key facts
- Shanghai plans to offer subsidies to encourage offshore debt issuance.
- The initiative aims to revive a dormant market in the city's free trade zone.
- Subsidies could reach up to 2.2 million yuan per issue.
- Onshore banks will be permitted to purchase bonds issued in the FTZ.
- The program is intended to run until the end of 2028.
Shanghai is preparing to introduce subsidies and other measures to revitalize its offshore debt market, aiming to transform the city's free trade zone into a significant global funding hub. The initiative, which has not been previously reported, comes as Beijing seeks to increase the international use of its currency, particularly in debt markets where low interest rates are driving record issuance.
The free trade zone was established 13 years ago, and its offshore bond market opened in 2016. However, it has struggled to attract substantial foreign investment, primarily serving as a fundraising channel for Chinese entities. The proposed subsidies, detailed by sources familiar with the plans, would cover advisory, legal, and banking fees, potentially up to 2.2 million yuan per issue. The most substantial rebates are earmarked for high-profile foreign issuers, including central banks.
These plans are still in development and subject to change. The subsidies are proposed to be available through the end of 2028 for bond issues exceeding 200 million yuan with maturities of one year or longer. Special incentives are also planned for green bonds and those incorporating financial innovations like the digital yuan.
In a significant move to bolster the market, the Shanghai head office of China's central bank is permitting onshore banks to purchase bonds issued within the free trade zone. This measure aims to support a market originally designed for offshore investors. Current regulations require qualified investors to be based offshore, making this a notable shift.
Developing the market into an international funding center presents challenges, with established hubs like Singapore and Hong Kong as competitors. A banking source cited poor liquidity and high issuance costs as previous hindrances. However, with the proposed subsidies, issuance costs for FTZ bonds are expected to become competitive with onshore yuan bonds, known as panda bonds.
The market experienced a lull for three years following a crackdown on fundraising by local government financing vehicles (LGFVs). Since its reopening, most of the debt raised has been by offshore arms of Chinese banks and brokerages. LGFVs still constitute a significant portion of the FTZ bond market, highlighting the regulatory balancing act between market support and organic development.
The PBOC's guidance for onshore banks investing in FTZ bonds includes managing such investments through specially administered accounts, using quotas, and capping onshore money in any single bond at 50% to ensure "high-quality" market development.
Attractive yields are a key draw for issuers, with China's benchmark rates among the lowest globally. For instance, a recent three-year bond from the overseas unit of Shanghai Electric Group had a coupon of 1.8%, significantly lower than the effective yield for the ICE BofA U.S. BBB corporate bond index. Experts view FTZ bonds as integral to China's financial infrastructure and its push for yuan internationalization, complementing other offshore yuan debt instruments like dim sum bonds.