(ATF) China’s National Development and Reform Commission (NDRC) has announced a list of pilot reforms it will test in Shenzhen, including being allowed to issue offshore bonds.
The seven items on ‘the List’ relate to opening up the Shenzhen development zone, which is close to Hong Kong. They include authorising local officials to issue its nationally approved local debt quota, plus other innovative government debt-raising mechanisms. Most importantly, it will allow Shenzhen to issue offshore yuan local government bonds overseas.
Peng Sen, chairman of the China Society for Economic System Reform and a former deputy director of the NDRC, told the paper.cn that comprehensive authorisation pilot reforms in important areas will solve some major institutional problems if these powers are truly handed over to Shenzhen. In this happens, officials in the southern tech city will get comprehensive reform autonomy to promote market-oriented reforms and a higher level of opening up to the outside world.
The world's major economies have successively implemented quantitative easing via monetary policies, and interest rates and return on assets have continued to decline or gone negative. The NDRC is hoping that as the economies of Europe, America and other regions have not yet recovered from the epidemic, foreign states and regions have a stronger demand for yuan and foreign exchange reserves.
In addition, China’s financial industry has expanded various measures to open up to the outside world, and is now keen to open further to allow local governments to issue debt in overseas markets. The paper.cn believes yuan bonds are coming of age at the right time.
Foreigners hold $390 billion in yuan bonds
As the Chinese bond market expands and opens up, foreign investors continue to increase their positions in Chinese bonds. Recent data shows that the amount of bond held by foreign institutional investors has increased significantly. In September, the amount of yuan bonds in the custody of foreign institutional investors reached nearly 2.6 trillion yuan (nearly $390 billion), an increase of 134 billion yuan from August and a year-on-year increase of 44.66%. This is the 22nd consecutive month that foreign investors have increased their holdings of Chinese bonds.
Zhong Huiyong, associate professor of the School of Finance at Shanghai University of International Business and Economics, who is deputy director of the Institute of Financial Development, told The Paper that Shenzhen had been chosen as a pilot zone and a series of supporting policies introduced to support that.
Zhong Huiyong said Shenzhen’s local financial situation was very good. It will test the issuance of bonds abroad, and – if successful – that policy may be promoted in other parts of the country in the future. In other words, other local government bonds may also be issued overseas.
The Shenzhen Special Economic Zone was built to trial economic reform. In fact, President Xi's father allegedly played a role in that 40 years ago.
Today Shenzhen's per capita GDP has reached US$30,000, which is equivalent to the level of a high-income countries. And the per capita disposable income of Shenzhen residents has reached more than 60,000 yuan.
Promoting RMB bonds in global markets
The global bond market is mired in a negative interest rate vortex, and the value of yuan bond investment is prominent. The Eurozone, Japan and other countries and regions have long implemented negative interest rate policies, and bonds with negative interest rate now total more than US$10 trillion worldwide. That is nearly a quarter of the global investment-grade bonds.
Wang Yuanwei, of China Development Bank Research Institute, believes the issuance of yuan bonds by local governments in overseas markets is of great significance, as it can broaden local government financing channels and effectively alleviate local financial pressure. He also believes it can promote deep integration of yuan bonds into the global financial market and promote international use of the yuan.
Zhong Huiyong said in order to expand overseas financing channels, some regions, including Shenzhen, have begun innovative exploration. In March this year, Sichuan Province took the lead in distributing local bonds to overseas investors through "Bond Connect" and other methods. Now, Shenzhen is also exploring the issuance of green municipal bonds overseas.
Wang Yuanwei also suggested that they explore the use of policy-based financial institutions to underwrite local government offshore bonds, by using the China Development Bank and the Export-Import Bank of China.