MNI: Hainan's FTP To Promote Yuan Internationalisation

Hainan’s Free Trade Port is expected to boost offshore yuan circulation, with the island likely to increase fixed-income issuance in Hong Kong and potentially introduce Free Trade Zone (FTZ) bonds to promote overseas use of the currency, advisers told MNI.

The new framework implemented in December creates a “quasi-offshore” environment, allowing the yuan to circulate in a closed loop of outbound and inbound flows with greater institutional flexibility, said Song Ke, deputy director of Renmin University’s International Monetary Institute. (See MNI INTERVIEW: China’s Yuan Needs Greater Flexibility – Huang)

Under the system, eight ports will operate as “first-line” ports, permitting near-free cross-border movement of goods, capital, and personnel between Hainan and international markets, while 10 “second-line” ports will remain under differentiated supervision between Hainan and the mainland.

This two-tier structure enables offshore yuan to flow efficiently into Hainan for industrial investment and financial asset allocation through Electronic Fence (EF) accounts, with streamlined documentation expected to increase the frequency of yuan usage in goods and services trade, he said.

FTZ BONDS

Given rising funding demand for the FTP construction, the Hainan government may expand offshore yuan bond issuance in Hong Kong from the CNY18 billion issued over the past four years, said Liu Ying, research fellow at the Chongyang Institute for Financial Studies, Renmin University. She noted issuance over the last two years had been successfully settled through EF accounts, laying the groundwork for future offshore offerings, including FTZ bonds.

Song noted that launching FTZ bonds – first introduced in the Shanghai FTZ – would align with Hainan’s goal of high-level institutional opening and the orderly internationalisation of the yuan. Hainan’s institutional design and EF system provide a “netted” environment for the issuance, trading, and settlement of offshore bonds, balancing market openness with risk control, Song added, noting the second phase of the capital flow monitoring platform, featuring enhanced macro- and micro-level indicators, had been completed.

A banking industry insider told MNI that Hainan’s FTZ bonds would mainly be issued in Hong Kong and it could also explore issuance within the island via EF accounts. “There is room for moderate expansion, but not a substantial increase in scale,” the insider said. He also highlighted regulatory challenges, including restricting issuers to overseas entities or subsidiaries of domestic firms and strengthening oversight to prevent misuse by local government financing vehicles. The bonds will also need to attract foreign investors and overseas banks to avoid excessive concentration among domestic banks, he said.

FINANCIAL INFRASTRUCTURE

To encourage overseas entities to hold yuan, Hainan must develop a broader range of wealth management products, derivatives, and risk-hedging tools tailored to offshore yuan users, Song said.

Authorities should deepen financial infrastructure connectivity with Hong Kong to improve clearing and custody mechanisms and align with international standards on disclosure, credit ratings, legal processes, anti-money laundering, sanctions compliance, and taxation, he added. 

Song also recommended expanding the scope of pilot enterprises eligible for EF accounts, lowering entry thresholds for high-quality small and medium-sized firms, and including more financial institutions to strengthen service capacity. As of November, 11 banks in Hainan had opened 729 EF accounts, facilitating cross-border transactions worth CNY295 billion with 80 countries and regions, he said.

ECONOMIC DEVELOPMENT

Liu said the FTP could benefit Southeast Asian economies, which could settle transactions directly in yuan when exporting tropical agricultural products and mineral resources to Hainan. Overseas suppliers could also use funds within the province without currency conversion to purchase Chinese electromechanical products and consumer goods or invest in local industries.

A key advantage of the FTP is that products processed in Hainan using imported materials can be sold to the mainland tariff-free, provided the value added exceeds 30%, Liu noted. She said the system would attract foreign investment and facilitate a closed loop for offshore yuan circulation within Hainan before returning to the mainland.

Liu identified strong economic potential in integrated industrial chains linking ASEAN, Hainan, and the mainland, covering tropical agriculture and food processing, the digital economy, healthcare and biomedicine, and the blue economy. However, Hainan’s relatively weak industrial base may constrain early-stage development, she cautioned, highlighting the need to strengthen both traditional and technology-driven infrastructures such as fiber-optic networks, 5G and 6G connectivity, and financial infrastructure.