Shanghai free-trade zone

Shanghai Free Trade Zone to allow companies to raise yuan bonds

PUBLISHED : Monday, 13 June, 2016, 9:00pm
UPDATED : Monday, 13 June, 2016, 9:00pm

Shanghai is making a renewed effort to add lustre to the country’s first free-trade zone (FTZ), with plans to launch renminbi-denominated bonds in the “mini-Hong Kong”territory as a way to reinforce the yuan’s bid to become an international currency.

Speaking at the Lujiazui Forum on Monday, Zheng Yang, director of the Shanghai Financial Service Office, said that sales of municipal and green bonds would be conducted in the FTZ within this year, targeting global investors.

It will be the latest step Shanghai takes to liberalise the finance sectors in the FTZ after nearly three years of lacklustre operations in what was to be the testing ground for the country’s major economic reforms.

Zheng said that debt sales in the zone, which was established in September 2013, have secured support from the central government and the city would fine-tune relevant rules to facilitate the liberalisation.

A mature and established bond market with active participation from global investors is much needed to support the mainland’s move to internationalise the local currency. Mainland Chinese companies presently tap Hong Kong’s Dim Sum bond market to obtain offshore yuan funds.

The FTZ yuan bonds would be an initial step taken by the mainland to link the onshore and offshore bond markets.

The scale of the bonds sold in the FTZ won’t be large enough to attract a huge flow of foreign funds
Liu Xuezhi, Bank of Communications

“The scale of the bonds sold in the FTZ won’t be large enough to attract a huge flow of foreign funds,” said Liu Xuezhi, a Bank of Communications analyst. “But experience could be gained to help China eventually connect the onshore and offshore bond markets.”

On Monday Shanghai and Hong Kong signed a memorandum of understanding to deepen financial cooperation and Zheng said the mainland city hoped to enlist the help of Hong Kong to attract more global financial investments.

Beijing is gradually opening up its vast US$8.5 trillion (HK$66 trillion) bond market to foreign investors but buying appetite among global funds appeared to be weak due to concerns about the transparency of the bond issuers and the mainland’s opaque rule of law.

A rising number of bond defaults on the mainland not only exacerbated bearish sentiment on China’s economic and corporate fundamentals, but raised doubts about the weak financial disclosure and unreliable credit-rating system in the country.

Beijing has promised to make yuan fully convertible in the Shanghai FTZ to facilitate cross-border fund flows.

It is expected that bond issuance and trading in the FTZ would be operated on par with international standards with foreign investors allowed to clear and settle the bonds using an international central securities depositary account.