As part of its five-year development plan, Shanghai aims to establish an offshore financial zone to strengthen its position as a global financial hub, which would represent a major step forward for China's financial sector.

Offshore financial markets, unlike their onshore counterparts, operate with relaxed regulations and tax benefits, primarily serving non-residents through transactions in foreign currencies. This approach helps to attract foreign investment in renminbi assets by creating a more favorable regulatory environment.

The China (Shanghai) Pilot Free Trade Zone, with its free trade account system, serves as a model in this regard, separating offshore and onshore funds.

"Creating an offshore financial zone is crucial for Shanghai if it wants to improve institutional openness and build a robust financial ecosystem," said Zeng Gang, deputy director of the National Institution for Finance and Development.

Shanghai's plan includes expanding cross-border financial services, simplifying investment processes, and promoting offshore bonds. The move comes at an opportune time, as China's lower interest rates compared to developed economies make it an attractive financing location for foreign investors.

The Hong Kong branches of the Bank of China and the Bank of Communications have already issued offshore bonds, with both issuers and investors being foreign entities. Shanghai's authorities have set guidelines to further promote these bonds, requiring both parties to be based outside China.

The offshore bonds are gaining international traction. As credit ratings and foreign exchange tools improve, more global investors are expected to participate.