Aug 28 (Reuters) - Shanghai plans subsidies for offshore issuers selling bonds and measures to deepen debt investment as part of a renewed push to turn a long-dormant market in the city's free trade zone into a global funding hub, people familiar with the effort said.

The free trade zone was launched 13 years ago ‌and an offshore bond market opened in 2016, but the market has failed to gain meaningful foreign participation, remaining largely a fundraising channel for Chinese borrowers.

The initiative ‌to attract offshore debt sales, not previously reported, comes as Beijing's promotion of the global use of its currency is finding the most traction in debt markets where low rates are spurring record issuance.

The Shanghai Financial Regulatory Bureau proposes ​a suite of subsidies for advisory, legal, banking and other fees, running up to 2.2 million yuan ($327,000) per issue, with the most generous rebates offered to high-profile foreign issuers such as central banks, according to people familiar with the plans.

The plans have not been finalised and could change, said the people, who did not want to be identified as the information has not been made public. The proposed subsidies would be available to the end of 2028 and apply to issues worth more than 200 million yuan at tenors of a year or more, they said.

Additional subsidies would also apply for green ‌bonds, where the proceeds are spent on environmentally friendly projects, or ⁠if the bonds use financial innovations such as the digital yuan.

The Shanghai head office of China's central bank is also allowing onshore banks to buy FTZ bonds, a measure aimed at supporting a market designed for offshore investors, according to a source familiar with the matter.

The central bank and ⁠the Shanghai government did not reply to Reuters requests for comment on the latest reforms and plans.

PBOC Governor Pan Gongsheng vowed to develop the city into a hub for offshore financial services at last year's Lujiazui forum, an industry gathering at the heart of Shanghai's FTZ.

Seminars hosted by China's bond depository and clearing house to promote the market to issuers, banks, brokerages and ratings agencies were held earlier this month ​in ​Shanghai and on Friday in Shenzhen, according to sources and invitation letters.

LONG ROAD TO DEEPEN MARKET

Developing the market ​into an international funding hub is a difficult task, with competition in ‌Asia from Singapore and Hong Kong.

One banking source, who spoke on condition of anonymity, said poor liquidity and relatively high issuance costs had been holding the market back.

"But with the subsidy support, the issuance costs of FTZ bonds will be no higher than those of panda bonds," he said, referring to so-called onshore yuan bonds issued by overseas companies and institutions.

Issuers returned only last year to Shanghai's "pearl bond" market after a three-year lull prompted by a crackdown on fundraising by local government financing vehicles (LGFV).

All but one of the 7.1 billion yuan worth of debt raised since then has been by offshore arms of Chinese banks and brokerages.

LGFVs still account for 78% of the FTZ bond market, according to TF Securities, and the reform proposals highlight the balancing act ‌between supporting the market and also allowing it to develop on its own.

PBOC Shanghai's permission for local banks ​to invest in FTZ bonds is a significant signal of regulatory support because current rules require qualified investors to ​be based offshore.

But the PBOC also said it would manage such investment, which is ​done through specially administered accounts, using a quota and a cap on onshore money in a single bond at 50%, to ensure "high-quality" development of the ‌market, according to the person familiar with the guidance. They requested anonymity.

The ​biggest drawcard for issuers may well be yield, ​with benchmark rates in China among the lowest in the world.

A three-year bond sold by the overseas unit of Shanghai Electric Group earlier this month, the first FTZ bond by a non-financial issuer since the market reopened, has a coupon of 1.8%. That compares to an effective yield around 5.5% for the ICE BofA U.S. BBB corporate bond ​index, a gauge of dollar borrowing costs.

Terry Zhang, head of global ‌strategy and business management at CSPI Ratings, said the FTZ bond market has become part of China's financial infrastructure and Beijing's push for yuan internationalisation.

"FTZ bonds can ​complement dim sum bonds and panda bonds in providing offshore yuan liquidity, and promoting cycling of yuan capital," he said. Dim sum bonds are yuan debt ​issued outside of mainland China, mainly in Hong Kong.

(Reporting by Reuters Staff; Editing by Jacqueline Wong)