China Revives Free-Trade-Zone Bond Market After Crackdown

Shanghai Electric Group Co., an energy-equipment maker backed by the city, sold 1.5 billion yuan ($222 million) of three-year green notes at 1.8%, according to a person familiar with the matter who asked not to be identified. The so-called pearl bond drew more than 19.1 billion yuan of orders as of Wednesday evening, more than 12 times the final issuance size, the person added.

Chinese policymakers want companies to sell more yuan-denominated notes offshore through various mechanisms including the FTZ, though they've also erected barriers to stem a risky buildup of debt. In recent months, the government has discouraged firms from raising money at higher yields, taken longer to approve proposals for overseas borrowing and restricted use of a popular loan structure.

"The 2023 pause in FTZ offshore bond issuance is a good example" of "China's open-tighten-reopen cycle," said Lei Zhu, head of Asian fixed income at Fidelity International. "The overall direction toward greater financial opening has remained largely unchanged, but policymakers adjusted the pace when financial stability risks began to build."

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The Shanghai FTZ was set up in 2013 and initially allowed domestic and foreign companies to sell offshore bonds in any currency, though the market has so far been dominated by yuan debt. By 2023, it had become a popular avenue for debt-ridden local government financing vehicles to raise money, prompting regulators to halt purchases of pearl bonds by domestic banks.

Banks and securities firms resumed using the pearl-bond market last year after officials lifted restrictions. Issuance before the latest deal was up more than five-fold from the same point in 2025 at $512 million, according to data compiled by Bloomberg. That's a tiny fraction of the country's $19 billion market.

Pearl bonds can offer international investors more peace of mind because the market is fully regulated by onshore Chinese authorities who allow only high-quality issuers, according to Fidelity's Zhu. That's important after offshore investors in recent years experienced a wave of property-sector defaults, she said.

There are signs that China's efforts to open its capital markets are paying off. Issuance of dim-sum bonds have reached a year-to-date record, while offshore bonds sales by Chinese companies linked to the Shanghai Clearing House have also risen. Panda bonds, used by foreign entities to sell yuan bonds in mainland China, reached a new high this year.

Moody's Ratings upgraded Shanghai Electric by one notch in June to A3.

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The new bond is the company's first offshore sale since 2020 and is being sold through an overseas subsidiary to comply with new rules for the FTZ. The note will be guaranteed by the company's Hong Kong subsidiary and supported by a keepwell deed from Shanghai Electric, the person familiar said.

Shanghai Electric has approval from regulators to issue offshore bonds worth €500 million in total and may tap the debt market again to use the rest of the quota, Chief Financial Officer Xudong Wei said in an interview.

"Our preference would be to issue either in the dim-sum bond market or the FTZ bond market, given the lower funding costs in renminbi and the ongoing internationalization of the currency," Wei said.