YUAN BONDS
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Shanghai free-trade zone

Shanghai issues first yuan bond in lacklustre Free Trade Zone

The 3 billion-yuan local government bonds were sold at a yield of 2.85 per cent and were 2.78 times oversubscribed, according to the Finance Ministry

PUBLISHED : Thursday, 08 December, 2016, 8:06pm
UPDATED : Thursday, 08 December, 2016, 10:53pm

Shanghai for the first time issued yuan-denominated bonds in its free-trade zone (FTZ) on Thursday, a step that could help entice capital inflow as the city renews efforts to push the yuan as an international currency by embracing global investors.

The move came after nearly three years of lacklustre operations in the free trade zone, which was supposed to be the testing ground for the country’s major economic reforms.

The three-year 3 billion-yuan (HK$3.4 billion) local government bonds were sold at a yield of 2.85 per cent and were 2.78 times oversubscribed, said the Finance Ministry in a statement on its website on Thursday.

It is the first time that overseas banks - Standard Chartered, HSBC and DBS - have underwritten local government bonds, the ministry said.

It enriches the market participants, enlarges the market scale, increases bond investment products and promotes the issuance of local government bonds
Wesley Yang, Standard Chartered

Wesley Yang, head of financial markets, Standard Chartered Bank China, said the issuance marks the start of the FTZ bond market – China’s third onshore bond market after the interbank and exchange markets.

“It is significant to the China bond market development because it enriches the market participants, enlarges the market scale, increases bond investment products and promotes the issuance of local government bonds,” he said. Yang expects more fixed-income products - such as SDR bonds, denominated in the IMF’s Special Drawing Rights currency - to be issued in the zone in the future.

David Qu, a markets economist at ANZ in Shanghai, said the yield, close to the top end of the bidding range of 2.26 per cent to 3.05 per cent, is largely in line with market expectations, though it is lower than the yield of bonds issued by the Finance Ministry in Hong Kong earlier this year.

“Authorities are mainly targeting building up the yuan bond market on the mainland via the trial in Shanghai FTZ,” he said. “But it’s also true that the issuance could help attract capital inflow against the backdrop of growing capital outflow now.”

The issuance comes at a time of heightened capital outflows as the yuan plumbs daily lows.

Beijing has already launched a series of measures to curb the flow of money from the country, including beefing up checks on outbound deals’ authenticity and making it more difficult to lend yuan overseas.

In November, Zhang Xin, head of the Chinese central bank’s Shanghai branch, told a government conference that the Shanghai free trade zone, the mainland’s first Hong Kong-style free market place, would aim to redirect capital flows to achieve a net inflow in 2016, in line with the authorities’ goal of stabilising the financial markets.

A veteran bonds trader who declined to be named said it is still too early to predict the growth potential of the scheme because of its relatively limited scale.

The bond is part of a combined 114.3 billion yuan in local government bonds sold by the Shanghai municipality this year.

A mature and established bond market with active participation from global investors is seen as an essential part of Beijing’s moves to internationalise the yuan. Mainland companies also tap Hong Kong’s dim sum bond market to obtain offshore yuan funds.

Beijing is gradually opening up its US$8.5 trillion bond market, but interest from abroad appears to be weak because of transparency concerns around the bond issuers and the rule of law.

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