Hong Kong’s offshore yuan bond market is emerging as a significant funding avenue for global financial institutions, particularly US lenders, even as the currency’s traditional borrowing cost advantage over the US dollar diminishes. This shift highlights evolving financial connections between Wall Street and China amid ongoing geopolitical tensions.

According to a recent report by Bank of America Global Research, issuance of offshore yuan-denominated bonds, commonly known as dim sum bonds, has reached 774 billion yuan (approximately HK$909.5 billion) as of October 20, marking a 68 percent increase from the previous year. Financial institutions were responsible for 57 percent of this total, with their issuance more than doubling—rising 139 percent compared to a year ago.

Foreign financial entities accounted for 333 billion yuan of the bonds issued, representing a 169 percent increase year on year and more than double their average annual issuance from 2022 to 2025. US banks have been at the forefront of this surge, raising 167 billion yuan, an increase of 130 billion from last year. In total, US global systemically important banks have issued the equivalent of US$22 billion through offshore yuan bonds so far this year. This volume positions the yuan as their third-largest funding currency after the US dollar and the euro, surpassing sterling.

The ongoing growth in yuan bond issuance persists despite the narrowing cost gap. By the end of September, yields on three-year yuan government bonds, when hedged against currency risk, were just about 0.1 percentage points lower than comparable US Treasury yields. The report noted that the expansion of offshore Chinese capital has “fundamentally changed the rationale” for issuing yuan bonds, with access to Chinese capital markets becoming a key driver rather than cost savings.

The rise of the dim sum bond market coincides with a contraction in China’s offshore US dollar bond market, which has shrunk to roughly US$40 billion from its peak in 2021. This decline reflects a slump in property-sector issuance and broader corporate deleveraging, according to the report. The outstanding dim sum bond market has nearly quadrupled since the end of 2021 to 1.9 trillion yuan, now representing about 70 percent of the size of the offshore US dollar bond market.

Mainland Chinese investors have also played a prominent role in this growth. Holdings via the southbound Bond Connect scheme, which permits mainland investors to access Hong Kong’s offshore bond market, reached 1 trillion yuan by the end of August, an increase of 85 percent year on year following expanded institutional participation. Notably, nearly 30 percent of dim sum bonds issued this year carry maturities averaging more than seven years.

Chinese technology firms are increasingly using the offshore yuan market to finance artificial intelligence investments, with their issuance rising to 57 billion yuan this year. Looking ahead, further expansion of the market will depend largely on Beijing’s willingness to facilitate additional offshore capital outflows from the mainland. Authorities recently raised the annual southbound Bond Connect quota from 500 billion yuan to 800 billion yuan after nearing the previous limit.

“The question is no longer whether the [offshore yuan] market will continue to grow, but rather how quickly regulators will allow offshore yuan capital pools to expand,” the report concluded.