China’s nascent ‘free trade zone’ bonds set for record sales

The "free trade zone" bonds were introduced in 2016 in a bid to promote the internationalisation of the renminbi. PHOTO: REUTERS

BEIJING – A once-obscure corner of China’s offshore corporate bond market is buzzing with activity, with issuances set to hit a record in 2023 as investors hungry for yield pour into such debt.

Firms have sold 29.2 billion yuan (S$5.7 billion) of bonds registered in the Shanghai Pilot Free Trade Zone so far in 2023, with the amount set to cross the record 36 billion yuan issued in 2022, according to Bloomberg-compiled data. Sales of such bonds rose as yield-hungry investors piled into notes offering a rate of about 4.6 per cent in 2023, compared with an average of 4 per cent for onshore bonds.

By design, free trade zone (FTZ) bonds belong to the offshore market and have been overwhelmingly renminbi-denominated, though they can be in any currency. The sales process is almost identical to marketing offshore notes, including getting approvals from China’s top economic planning agency.

These bonds are slightly different from offshore dollar bonds or “dimsum” bonds – which are denominated in renminbi and issued outside China – as they are usually cleared by China Central Depository and Clearing rather than global peers such as Euroclear. The investor base is also relatively smaller.

A vast majority of the so-called FTZ bonds were sold by China’s local government financing vehicles (LGFVs), data shows.

Higher US Treasury rates and increased credit market volatility made issuing such bonds “a preferred alternative” to dollar and onshore bonds, especially for LGFVs with refinancing needs for dollar bonds in 2023, said Eastspring Investment Management (Shanghai).

Its head of fixed income, Ms Janet Lu, said: “The FTZ bonds provide a certain pickup in yield compared with onshore bonds, which is usually in the range of 20 basis points to 50 basis points, due to the smaller investor base for FTZ bonds.”

Since the last quarter of 2022, there has been a clear rising trend in borrowing costs of FTZ bonds. The yields have risen as more LGFV issuers with lower credit ratings raised funds through this space, given their difficulties in selling dollar bonds offshore, said CSCI Pengyuan Credit Service senior analyst Shi Xiaoshan.

The FTZ bonds were introduced in 2016 in a bid to promote the internationalisation of the renminbi and Shanghai’s emerging role as a global financial hub. But progress has been slow: It was not until the end of 2019 that the first corporate issuer sold a bond in the zone, which was set up in 2013, and sales volume began to take off only in late 2022.

“If the issuer isn’t concerned about whether the bonds are widely distributed and traded in the secondary market, then the free trade zone format may be suitable for them,” said Mr David Yim, head of Greater China and North Asia Capital Markets at Standard Chartered.

There have also been non-LGFV corporate issuers in the market in recent months. A unit of developer China Jinmao Holdings Group sold a 2.05 billion yuan note in January with a 4 per cent coupon. Bocom Leasing Management Hong Kong also did a 2.4 billion yuan deal in December with a 2.9 per cent coupon. 

“When you start to see frequent issuers in the offshore market doing deals in the free trade zone, it means people will have to pay more attention to this segment of the market,” Mr Yim. BLOOMBERG

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