Investors are shifting away from the US dollar, and companies are refinancing their dollar-denominated debt in yuan.
The offshore yuan bond market in China is on track for the strongest year on record, showing growing confidence in China’s currency and a gradual shift away from the US dollar.
It has mushroomed as a group of international borrowers, and investors take advantage of favorable funding conditions, a strengthening yuan, and positive policy signals from Beijing to issue dim sum bonds.
Offshore yuan bonds are sold for a total of some 870 billion yuan ($123 billion) this year — exceeding the full-year figure for 2023. The milestone marked the eighth consecutive year of growth, according to compiled data, and reflects the market’s shift from a narrow funding source to a major contributor to global capital flows.
Momentum has steadily increased this year, as issuers rushed to capitalize on low borrowing costs. Yet, at the same time, investors have been looking beyond dollar assets in search of diversification as the world remains unsettled amid a cascade of global trade wars, while shifting currency movements dictate where to invest and what not.
China’s low interest rates have been a primary driver of the issuance boom. Borrowers have been able to obtain offshore yuan debt at a significantly lower cost than funding in any of the world’s major currencies, prompting both Chinese and foreign issuers to enter the market.
The strain has been felt most acutely on long-dated bonds. This year has seen a record 152 dim sum bonds with maturities of at least 10 years being sold, nearly double the number issued at this time last year. The trend suggests increased confidence in the long-term stability and appeal of the yuan as a reserve currency.
A handful of high-profile issuers have helped drag the market to new lows. Singaporean sovereign wealth fund investor Temasek Holdings, global insurer Chubb Ltd., and Chinese technology giant Tencent Holdings have all sold 30-year yuan-denominated bonds. This maturity was rare in the dim sum market. Their involvement has boosted investor confidence and widened the market’s audience.
Rate differentials in favor of the yuan remain. The 10-year government bond yield in China is approximately 1.84%, significantly lower than the roughly 4.16 percent yield on comparable US Treasuries. Many issuers are keen to lock in these low rates, and economists say they are betting that China’s economic prospects will improve over the next several years, making financing costs less attractive than they are now for at least some time to come.
Movements in currencies have further stoked demand for offshore yuan bonds. The yuan has appreciated over the year, as the US dollar fell about 3.9% against the Chinese currency through the beginning of 2025, breaking a three-year streak in which it had risen. This has led investors to reposition their portfolios and add more yuan-denominated assets. China’s companies are also scrambling to restructure their debt.
Firms grappling with elevated US interest rates are attempting to roll over dollar-denominated liabilities by borrowing in yuan. The move reduces borrowing costs and insulates from fluctuations in the currency exchange rate. Yet while this may no longer be the case, Chinese firms remain highly indebted in foreign currency. The world’s outstanding US dollar-denominated bonds total approximately $750 billion; roughly one-third of these are due for repayment over the next two years.
Additionally, the necessity to refinance that debt is generating a steady demand for offshore yuan issuance as well. New sovereign and quasi-sovereign borrowers have also been lured into the market. Offshore yuan bonds were issued this year by Indonesia and the Development Bank of Kazakhstan, diversifying issuers and giving the yuan a more prominent role in cross-border finance.
In July, the People’s Bank of China and the Hong Kong Monetary Authority expanded the Southbound Bond Connect program to include non-bank financial institutions, such as fund managers, insurers, and securities companies. Regulators are also considering more investment quotas, which could help encourage demand and liquidity.
There remain challenges, including thin trading and a lack of hedging options such as cross-currency swaps. Still, stronger policy support, stronger issuer confidence, and a worldwide search for substitutes for dollar assets are generating the conditions for further growth, analysts say.
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