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Free-trade-zone bonds offer third route for issuers

(ATF) The links between China’s domestic and foreign bond markets are accelerating. At the 2021 Bond Market Development Forum held on January 18, Chen Gangming, general manager of CCDC, China’s central clearing house, said they would support the opening of the bond market and consolidate the base for interconnection – by backing development of onshore and offshore markets this year and improving a support program for free-trade-zone bond issuance.

First Finance reported that the first issue of free-trade-zone bonds by enterprises can be traced back to 2019. At that time, Nanjing Southeast State-owned Investment Group Co Ltd issued China (Shanghai) Free Trade Zone and overseas bonds. The approval quota of the FTZ bonds is 2.8 billion yuan ($431.5 million), the initial issuance amount was 1 billion yuan, over 5+5 years, with a 4.6% coupon rate, and it has an advantage over the issuer’s domestic comparable bond issuance cost. This is a corporate entity first issue of FTZ and overseas bonds.

Financial services in free trade zones are gradually becoming mature. As an innovative product, FTZ bonds are closely linked to domestic and foreign markets. According to analysis by industry insiders, from the current regulatory system, FTZ bonds can be regarded as foreign bonds, and they are basically the same as foreign bonds in terms of foreign debt filing, projection procedures, fund return and supervision.

Compared with the interbank bond market, bond investment entities in the free- trade zone are more diversified and internationalized and have a wider range of issuers. Compared with the domestic market, FTZ bonds are like a new channel in the overseas bond market, providing new options for overseas financing of Chinese-funded enterprises. The industry generally expects FTZ bonds to become conventional US dollar bonds and other overseas bonds. 

As far as the CCDC is concerned, as the unified registrar and custody institution of FTZ bonds, it mainly provides services in their issuance, custody and settlement links, and replaces the traditional overseas bond issuance with the European clearing house headquartered in Luxembourg. The international securities depository bank Clearstream is the leading international bond clearing mechanism. Chen Gangming said that since 2020, the company had helped the domestic and international dual-cycle pattern, improved the free-trade-zone overseas issuance planning, and supports flexible settlement mechanisms, and increased precision marketing for overseas customers.

The CCDC also supports the opening of the bond market through the ‘global direct connection model,’ the Hong Kong Bond Connect model, and the Macau MOX model, serving more than 1,200 customers overseas, and foreign institutions hold more than 2.8 trillion yuan in debt in the company. At the same time, breakthroughs have been made in the interconnection between the company and the futures market, and the bond offset margin business has been fully implemented on five futures exchanges.

Chen Gangming said that in the future, he would continue to support the opening of the bond market and consolidate the foundation for interconnection. On the one hand, CCDC will promote detailed implementation of ChinaBond’s plan, to build a bond account system and service model that has both Chinese characteristics and is compatible with international practices, and continue to strengthen ties with overseas markets under policy framework.

The CCDC plans to establish a mechanism for the settlement of collateral defaults in the futures market, while backing the development of onshore and offshore markets, and improving the FTZ bond issuance support program.


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Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.

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