Another Chinese offshore RMB local government bond issuance is on the horizon. On September 5, the Guangdong Provincial Government announced a plan to issue up to RMB 5 billion in Chinese offshore local government bonds in Hong Kong in September, with the bonds set to be listed on the Hong Kong Stock Exchange.

Jameson Zuo, Director of Public Finance at CSPI Ratings, stated in an interview with Securities Daily that this issuance will further expand the Chinese offshore RMB local government bond market. It is an important step in broadening the financing channels for Chinese local governments abroad, attracting foreign investment to participate in domestic infrastructure, and promoting RMB internationalization.

Primarily classified as special bonds

Since the beginning of this year, Chinese offshore RMB local government bonds have seen continuous growth. On 8 August, Shenzhen successfully issued its 2024 Chinese offshore RMB local government bonds in Hong Kong, with a total issuance size of RMB 7 billion with maturities of 2, 3, 5, and 10 years. Notably, the 10-year bond was the first medium and long-term Chinese offshore RMB local government bond issued by a local government.

On September 5, the Guangdong Provincial Government announced its intention to issue up to RMB 5 billion in Chinese offshore RMB local government bonds, with maturities of 2, 3, 5, and 10 years. Proceeds from the 2-year bond will fund the Nansha project in Guangzhou, while the 3-year bond will finance major infrastructure projects in the Pearl River Delta Region. The 5-year bond will be categorized as a green bond.

"Guangdong's previous six Chinese offshore bond issuances were conducted in Macau. With this issuance in Hong Kong, Guangdong will become the first local government of mainland China to issue offshore bonds in both Hong Kong and Macau, facilitating financial connectivity within the Greater Bay Area and enhancing the dual circulation of onshore and offshore markets," said Jameson Zuo.

In fact, as early as October 2021, Shenzhen issued RMB 5 billion in Chinese offshore RMB local bonds in Hong Kong, marking the beginning of Chinese offshore RMB local bond issuances by Mainland governments. Following Shenzhen, Guangdong and Hainan provinces also issued Chinese offshore RMB bonds, typically with shorter maturities of 2, 3, or 5 years.

According to statistics from CSPI Ratings, since the first Chinese offshore local bond issuance by the Guangdong and Shenzhen governments in 2021, Guangdong, Shenzhen, and Hainan have cumulatively issued 25 Chinese offshore RMB local government bonds. Most of these have been special bonds, with proceeds primarily used for infrastructure projects and public services, including transportation, environmental protection, healthcare, and housing.

Boosting RMB Internationalization

Industry experts believe that the issuance of Chinese offshore RMB local government bonds in Hong Kong not only provides high-quality assets for Hong Kong's bond market but also enhances the global profile of Mainland China’s local government bonds. This will attract international investors to invest in onshore bonds through the “Northbound Bond Connect”, further promoting the marketization and internationalization of the Chinese onshore bond market.

From a policy perspective, the development of the Chinese offshore RMB market has been emphasized repeatedly. The "Resolution of CPC Central Committee on Further Deepening Reform Comprehensively to Advance Chinese Modernization" passed at the Third Plenum of the 20th Central Committee of the Communist Party of China, calls for promoting high-level financial openness, advancing RMB internationalization prudently, and developing the offshore RMB market.

From a practical standpoint, Chinese offshore RMB local government bonds are highly attractive to overseas investors, with many issuances being oversubscribed by more than three times. Participants include overseas commercial banks, policy banks, funds, insurance companies, and asset management institutions.

Moreover, Chinese offshore RMB local government bonds play a key role in promoting RMB internationalization. Jameson Zuo highlighted that these bonds not only diversify the offshore RMB bond market, drawing international attention to Chinese local government bonds but also open channels for Chinese local governments to attract foreign capital for economic development. This enhances the linkage between onshore and offshore Chinese local bond markets and enriches the investor base with participation from a wide range of international financial institutions, thus raising the internationalization and marketization levels of Chinese local government bonds.

Enhancing attractiveness from Multiple Angles

The history of Chinese offshore RMB local government bond issuance is relatively short. Currently, the market is still in its early stages, with small-scale issuance, low frequency, and shorter maturities. To further develop this market, experts suggest focusing on broadening the range of issuers, optimizing the maturity structure of bonds, standardizing the issuance process, and improving the foundational systems to attract more overseas investors.

“Diversifying the range of issuers and strengthening the institutional framework are key to enhancing the attractiveness of Chinese offshore RMB local government bonds,” Jameson Zuo noted. "On one hand, more economically developed and internationally recognized local governments in China should be encouraged to participate in offshore financing to diversify the issuer base. On the other hand, longer-term offshore RMB local government bonds should be explored to enrich the maturity structure of this bond category and gradually establish a yield curve for Chinese offshore RMB local government bonds. Additionally, improving institutional frameworks, promoting market-based pricing, and introducing international-standard credit ratings and information disclosure mechanisms will boost the liquidity of Chinese local government bonds.”

Source: Securities Daily