The Shanghai free-trade zone's bond market has seen resumed activity, with Shanghai Electric Group Co. marketing pearl bonds. The energy equipment maker, backed by the municipality, set initial price guidance at 2.4 percent for the offering. This transaction marks the first bond sale by a non-financial company in nearly three years in the market.
The market's activity largely ceased in late 2023. Chinese authorities curbed what they identified as excessive borrowing by local governments, prompting a pause in new issuance.
Regulators initially halted domestic bank purchases of pearl bonds during the 2023 tightening period. This market had become a popular channel for local government financing vehicles to raise capital, contributing to debt accumulation.
Following the lifting of these restrictions, banks and securities firms have resumed participation in the pearl bond market. Year-to-date issuance has risen, reaching over five times the volume recorded during the same period a year ago. However, this activity still totals just $512 million in sales, representing a fraction of the market's estimated $19 billion potential.
Chinese policymakers aim to increase companies' sales of yuan-denominated bonds offshore through various mechanisms, such as the free-trade zone. The Shanghai FTZ, established in 2013, was designed to allow domestic and foreign companies to sell offshore bonds in any currency, with yuan debt dominating.
Despite the push for greater financial opening, policymakers have also implemented measures to prevent risky debt accumulation. In recent months, the government has discouraged firms from raising capital at higher yields, extended approval times for overseas borrowing proposals, and restricted the use of certain loan structures.
Lei Zhu, head of Asian fixed income at Fidelity International, described the 2023 pause in FTZ offshore bond issuance as part of "China's open-tighten-reopen cycle." Zhu said the "overall direction toward greater financial opening has remained largely unchanged," but policymakers adjusted the pace when financial stability risks emerged.
Zhu also said pearl bonds offer international investors more assurance because the market operates under regulation by onshore Chinese authorities, permitting only high-quality issuers. The regulatory oversight gains importance after offshore investors experienced multiple property-sector defaults in recent years.
Beyond the FTZ, other indicators suggest China's broader efforts to open its capital markets are showing progress. Issuance of dim-sum bonds has reached a year-to-date high, and offshore bond sales by Chinese companies linked to the Shanghai Clearing House have also increased. Foreign entities also use Panda bonds to sell yuan-denominated bonds in mainland China.
