Firms have sold 29.2 billion yuan (R77.9-billion) of bonds registered in the Shanghai Pilot Free Trade Zone this year, set to cross the record 36 billion yuan issued last year, according to Bloomberg-compiled data. Sales of such bonds rose as yield-hungry investors piled into notes offering a rate of about 4.6% this year, compared to an average 4% for onshore bonds. 

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

These bonds are slightly different from the offshore dollar bond or Dim Sum bond market as they are usually cleared by China Central Depository & Clearing Co 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, data show. Higher US Treasury rates and increased credit market volatility have made issuing such bonds “a preferred alternative” to dollar and onshore bonds, especially for LGFVs with refinancing needs for dollar bonds this year, according to Eastspring Investment Management (Shanghai) Co.

“The FTZ bonds provide a certain pick-up in yield compared with onshore bonds, which is usually in the range of 20-50bps, due to a smaller investor base for FTZ bonds,” said Janet Lu, head of fixed income at Eastspring Investment Management (Shanghai).

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

Yuan’s internationalisation

The FTZ bonds were introduced in 2016 in a bid to promote the internationalisation of the yuan and Shanghai’s emerging role as an international financial hub. But progress has been slow: it wasn’t 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 only began to take off late last year. 

“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 David Yim, head of Greater China & North Asia Capital Markets at Standard Chartered Plc.

There have also been non-LGFV corporate issuers in the market in recent months. A unit of developer China Jinmao Holdings Group Ltd. sold a 2.05 billion yuan note in January with a 4% coupon. Bocom Leasing Management Hong Kong Co also did a 2.4 billion yuan deal back in December with a 2.9% 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,” Yim said. BM/DM