China’s financial regulators are drafting official rules to allow US dollar (USD) bonds to be issued in the country’s free trade zones (FTZ), according to sources close to the regulators. The six new free trade zones in Shandong, Jiangsu, Hebei, Guangxi, Yunnan, and Heilongjiang, which were opened in August, are also on the list.
According to the source, Chinese issuers will be allowed to issue USD bonds in free trade zones with more flexibility. One advantage of the FTZ USD bond is that the USD proceeds can be fully convertible into renminbi.
China is now the most active market in the G3 space. Data from Refinitiv shows that Chinese issuers have issued a total of US$135.39 billion bonds in the G3 market in the first nine months, accounting for half of the total G3 bond issuance.
Chinese issuers in the past normally tapped the Hong Kong or Singapore markets for USD bond issuance. The relaxation of the free trade zones opens another pathway for financing to Chinese issuers.
It is expected that Shanghai, as the financial hub of China, will act as the pilot free trade zone for the sale of the USD bond while the other free trade zones will follow.
On September 4, Shanghai International Port (Group) Co successfully issued an US$800 million bond. This was the first offshore bond deal from an FTZ issuer since two new areas including Lingang and Yangshan were included in the Shanghai free trade zone.
China has allowed the issuance of cross-border renminbi bonds since 2016, when the Shanghai government issued a 3-billion-yuan bond (US$430 million) in the Shanghai FTZ. This was the first FTZ bond opened to FTZ and overseas investors. The FTZ market was regarded as a third fixed-income market apart from the interbank and the exchange markets.
“A lot of foreign institutions are now in the Shanghai FTZ and have even started new operations in other FTZs,” says the source.