Financial innovation builds momentum at Shanghai FTZ
Print Edition
FINANCIAL institutions have launched additional innovations to promote trade and facilitate investment in China (Shanghai) Pilot Free Trade Zone amid further deregulation of financial services in the testing area for the economic reform policies in China.
Among the latest innovations unveiled by the Shanghai Financial Service Office, the Shanghai government sold 30 billion yuan (US$4.3 billion) worth of bonds on the city’s stock exchange on November 11. This marked the first time local government bonds have been issued on a bourse rather than in the interbank bond market.
The bonds carried yields ranging from 2.41 percent to 2.86 percent for maturities of three to 10 years.
The issuance was conducted through a system the stock exchange adopted in October with permission from the Ministry of Finance. Investors can still trade in the interbank market, transfer their bonds to local stock exchanges for trade there, or use them as collateral on loans.
Authorities have also launched innovative bond services in the FTZ. On December 8, the Shanghai Finance Bureau successfully issued 3 billion yuan of local government bonds with a 3-year maturity in the Shanghai FTZ through the Ministry of Finance’s government bond issuance system. The bid-to-cover ratio was 2.78 times.
This was the first time local government debt securities were issued in the Shanghai FTZ. Industry insiders say the successful placement of Shanghai Municipal Government FTZ bonds provides quality yuan assets to foreign institutional investors.
With the continuous development of the local bond market, the Shanghai FTZ will further unite global bond issuers and investors, developing the zone into an important hub that connects onshore and offshore yuan markets.
The Shanghai Municipal Government FTZ bonds are primarily intended for investors in the FTZ, as well as investors that have already opened free trade accounts. The securities can be traded and circulated through the international financial assets trading platform in the zone. China Chengxin International Credit Rating Co gave the bonds a triple-A credit rating.
Foreign underwriters, investors
The Shanghai Finance Bureau established an underwriting group for issuance of the bonds. The group is composed of eight leading underwriters and 14 regular members. Three foreign banks HSBC Bank (China), Standard Chartered Bank (China) and DBS Bank (China) were introduced for the first time as members of the underwriting group.
The Shanghai Finance Bureau indicated that this was the first time that foreign banks participated in the underwriting of local government bonds.
As a registered custody and settlement institute, China Government Securities Depository and Clearing Co provided integrated services for the issuance, including technical, registration, deposit, settlement, interest payment, valuation and information disclosure.
The company opened a branch in Shanghai earlier in 2015, and extended the core of its financial infrastructure to the Shanghai FTZ. The company has established a special work team for the issuance of Shanghai Municipal Government FTZ bonds. It also engaged in work related to policy connection, project design, business rule drafting, separate account checking and marketing, among other areas.
In addition, foreign investors are allowed to clear and settle their bonds using an international central securities depository account linked to the Shanghai Clearing House.
The scheme offers foreign investors the option to open settlement accounts via an international or local central securities depository, freeing them from having to deal with Chinese clearing houses; as is the case for foreigners investing in regular onshore bonds outside the FTZ.
The program also allows approved pilot commercial banks to transfer existing bonds from the domestic market to the FTZ.
SCH claims that FTZ bonds “provide a new market for offshore renminbi, offering corporate bonds with full range of credit profiles and yields.”
Casting off the old practice of trying to woo investors with preferential policies, the Shanghai FTZ is designed to attract them with reforms. Efforts are underway to streamline customs procedures, deregulate foreign investment, liberalize controls on financial flows and cut government red tape.
The zone, which covers about 121 square kilometers, comprises the Lujiazui financial hub, the Jinqiao manufacturing zone, the Zhangjiang high-tech base and the three bonded areas of Waigaoqiao, Yangshan and Pudong International Airport.
The Shanghai government is banking on the zone’s success as a centerpiece of the city’s plans to turn itself into an international financial center and global science and technology hub.
By virtue of the zone’s openness, the city is encouraging private banks to operate in the zone, providing capital for technology startups. It is also planning to set up an international intellectual property trading platform and allow overseas venture capital to directly invest in innovative domestic businesses.
The zone operates under a free trade account system designed to permit account holders to move funds in and out of China, free of the capital controls that apply outside the zone.
In 2014, regulators scrapped the need for administrative approval of overseas financing via free trade accounts and allowed account holders to raise up to twice the value of their registered capital. Foreign banks were also approved to handle free trade account services.
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