Amid Financial Turmoil, China’s Local Governments Issue Bonds in Hong Kong

Expert: bond issue sidesteps root problem

The entrance of the Hong Kong Monetary Authority (HKMA), on July 17, 2014. Bilong/Epoch Times Staff

The governments of China’s Hainan Province and the city of Shenzhen announced last month that they would issue up to 5 billion yuan (about $700 million) of offshore bonds in Hong Kong. China’s local governments, under financial stress, are using Hong Kong to access overseas funds, experts believe. However, Hong Kong’s economic outlook is not optimistic either.

The Hong Kong Monetary Authority (HKMA) announced on Oct. 24 that the government of Hainan Province would issue RMB (Chinese currency) offshore bonds in Hong Kong, with an amount not exceeding $5 billion yuan. The HKMA’s Central Moneymarkets Unit (CMU) will provide custody services for the bonds. The bonds will include blue bonds—with the proceeds used primarily for maritime economy and marine protection projects—and sustainable development bonds. 

The HKMA announced on the same day that the municipal government of Shenzhen, a city in southern China’s Guangdong province, would also issue up to 5 billion yuan of offshore bonds in Hong Kong. This is Shenzhen’s second bond issue in Hong Kong; the first was in 2021.

According to HKMA Secretary Eddie Yue, Hainan Province is the first local government outside of the Guangdong-Hong Kong-Macao Greater Bay Area to issue bonds in Hong Kong.

Yue said he hopes the issuance of the bonds by Hainan and Shenzhen will “strengthen Hong Kong’s status as a global offshore RMB business center and a premier green and sustainable finance hub in Asia.”

The Hainan Provincial Department of Finance earlier announced that it planned to issue 13.3 billion yuan (about $1.86 billion) of local bonds in October, including 11.8 billion yuan (about $1.65 billion) of new special bonds. However, this is the first time it will issue offshore RMB bonds in Hong Kong.

‘Zero COVID’ Policy Ruinous for Local Governments

“The purpose of Hainan’s bond issue in Hong Kong is to ease its financial stress,” Li Songyun, a longtime China economics analyst, told The Epoch Times on Oct. 28.

According to the Bank of China Research Institute, in the first seven months of this year, Hainan’s fiscal deficit increased by 30 percent compared to the same period last year. Its financial woes were shared by the broader Chinese economy. Among 31 Chinese provinces and cities, only Shanghai had a fiscal surplus, but that surplus shrank by 79.24 percent compared to the same period last year.

Citing data released by the Chinese Ministry of Finance, Bloomberg reported that China’s total fiscal deficit in the first three quarters of this year reached a record high of RMB 7.16 trillion (about $1 trillion), almost three times that of the same period last year.

Li said he believes the CCP’s “zero COVID” policy proved extremely costly for local governments in China. Large-scale tax refund policies and the sharp decline in land sales have also resulted in huge deficits in local finances.

Freedom, Rule of Law Essential to Hong Kong’s Prosperity

Regarding the issuance of offshore RMB bonds in the Hong Kong market by Chinese local governments, Li said: “Apart from expanding the financing channels in mainland China, [the CCP] is also attempting to use the Hong Kong financial market as a platform to bring in foreign capital. At the same time, while foreign capital is gradually withdrawing from the Hong Kong financial market, the CCP also hopes that by issuing more mainland Chinese bonds, it can activate the RMB bond trading in Hong Kong and consolidate Hong Kong’s position as an offshore RMB business hub.”

Xia Xiaoquiag is an independent political commentator and columnist based in the United States. Xia told The Epoch Times he believes Hong Kong’s economic future is less than rosy. For some time after the handover to China, he said, Hong Kong “continued to attract investment from all over the world and remained a prosperous international metropolis” because of “the core values of freedom and rule of law,” values left from a time when its political system was independent of mainland China.

However, Xia said, the passing of the Hong Kong National Security Law in 2020 was “equivalent to giving up Hong Kong’s status as an international financial center.”

When asked why the CCP would take such a risk, Xia said, “The CCP has now reached a point [at which] it has to maintain its rule at all costs.”