China Revives Free-Trade Zone Bond Market After 2023 Crackdown

Article content

(Bloomberg) — Signs of life are returning to the Shanghai free-trade zone’s bond market, which went quiet in late 2023 after Chinese authorities clamped down on excessive borrowing by local governments.

Article content

Shanghai Electric Group Co., an energy equipment maker backed by the municipality, began marketing so-called pearl bonds on Wednesday with initial price guidance set around 2.4%, according to a person familiar. It marks the first bond sale in almost three years by a non-financial company as authorities reopen the market with tighter rules for issuers and investors. 

Article content

Article content

Article content

Chinese policymakers want companies to sell more yuan-denominated bonds offshore through various mechanisms including the FTZ, though they’ve also erected barriers to stem a risky buildup of debt. In recent months, the government has discouraged firms from raising money at higher yields, taken longer to approve proposals for overseas borrowing and restricted use of a popular loan structure.

Article content

Article content

“The 2023 pause in FTZ offshore bond issuance is a good example” of “China’s open-tighten-reopen cycle,” said Lei Zhu, head of Asian fixed income at Fidelity International. “The overall direction toward greater financial opening has remained largely unchanged, but policymakers adjusted the pace when financial stability risks began to build.” 

Article content

The Shanghai FTZ was set up in 2013 and initially allowed domestic and foreign companies to sell offshore bonds in any currency, though the market has so far been dominated by yuan debt. By 2023, it had become a popular avenue for debt-ridden local government financing vehicles to raise money, prompting regulators to halt purchases of pearl bonds by domestic banks.

Article content

Article content

Banks and securities firms resumed using the pearl bond market last year after officials lifted restrictions. Year-to-date issuance has surged to more than five times what it was last year over the same period, according to data compiled by Bloomberg. Still, that activity has only amounted to $512 million in sales, a fraction of the $19 billion market.

Article content

Pearl bonds can offer international investors more peace of mind because the market is fully regulated by onshore Chinese authorities who allow only high-quality issuers, according to Fidelity’s Zhu. That’s important after offshore investors in recent years experienced a wave of property-sector defaults, she said.

Article content

There are signs that China’s efforts to open its capital markets are paying off. Issuance of dim-sum bonds have reached a year-to-date record, while offshore bonds sales by Chinese companies linked to the Shanghai Clearing House have also risen. Panda bonds, used by foreign entities to sell yuan bonds in mainland China, reached a new high this year.

Article content

Moody’s in June upgraded Shanghai Electric’s credit rating by one notch to A3 with a stable outlook.

Article content

The new debt will be the company’s first offshore bond sale since 2020 and is being sold through its overseas subsidiary to comply with new rules for the FTZ. The three-year notes will be guaranteed by the company’s Hong Kong subsidiary and supported by a keepwell deed from Shanghai Electric Group, the person familiar said.

Article content