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[SHANGHAI] Shanghai is considering issuing yuan-denominated municipal bonds in the city's free trade zone (FTZ), sources told Reuters on Friday, which would mark Shanghai's first such issue in the zone.
China launched its municipal bond market late last year, hoping that financial markets would impose budget discipline on provincial governments. Their borrowing has climbed to at least US$3 trillion in recent years, funded by opaque third-party financing vehicles.
Earlier this month, the Shanghai Municipal Finance Bureau had held a meeting with Chinese banks operating in the FTZ on Shanghai's plans to issue yuan-denominated bonds in the zone, said two of the sources with direct knowledge of the meeting.
An executive told the banks that Shanghai would like to issue the bonds as soon as possible, the two sources said.
During the meeting, the bureau had asked banks for their views on the size of the planned issue. Suggestions of between 1 billion yuan and 5 billion yuan were floated by the banks present at the meeting, said one of the sources.
Investors will be domestic financial institutions operating within the FTZ, which has fewer capital regulations. Chinese banks would be able to tap offshore funds for their purchases of the municipal bonds in the FTZ, said one of the sources.
It is not clear if foreign financial institutions with offices in the FTZ would be able to participate.
The sources declined to be identified because they are not authorised to speak to the media.
The Shanghai Municipal Finance Bureau said in an email to Reuters on Monday that Shanghai's government is currently looking into the issuance of municipal bonds, when asked if an offering in the FTZ was planned.
The bureau did not refer to the FTZ in its email.
In the past, provincial governments issued bonds via a pilot project overseen by the finance ministry. China then allowed them to issue directly in the second half of last year and to be fully responsible for payments.
To stoke demand for muni bonds, regulators will for the first time let banks use them as collateral when they borrow from the central bank, three sources told Reuters last week.