Key Highlights

  • Offshore borrowing in China's currency has reached roughly $149 billion so far this year, putting it ahead of last year's record total.
  • A 10-year Chinese government bond currently yields about 1.68%, compared with 4.78% for an equivalent US Treasury, close to the widest spread on record.
  • China's “dim sum” Bond Market has issued the equivalent of roughly $110 billion this year, while the “panda” bond market has already surpassed any previous full-year total.
  • Chinese entities account for close to two-thirds of dim sum bond issuance this year, using the proceeds to fund overseas operations.

Cheap Renminbi Funding Draws a Global Rush of Borrowers

Offshore borrowing in China's currency has hit a record high, as a growing number of international corporations and foreign governments look to take advantage of the country's low interest rates to borrow cheaply. Issuance in the “dim sum” and “panda” bond markets has reached roughly $149 billion so far this year, putting the total ahead of last year's record.

Borrowers can raise renminbi-denominated Debt outside mainland China through the dim sum bond market, or within mainland China through the panda bond market. The rise has been encouraged by Beijing as part of its effort to extend the global reach of its currency and compete with the US dollar-based financial system.

A Widening Rate Gap Makes Renminbi Debt Attractive

Borrowing in renminbi has become markedly cheaper as Chinese borrowing costs diverge sharply from those in the US. A 10-year Chinese government bond currently yields around 1.68%, compared with 4.78% for an equivalent US Treasury, close to the widest spread on record. The head of Capital Markets for Greater China and north Asia at a major international bank said investor participation in the market has been extraordinary, pointing to growing natural Demand for renminbi funding, whether for Investment in China or for paying suppliers directly in the currency.

Regulators expanded the amount mainland investors can send to Hong Kong through the southbound Bond Connect scheme over the summer, a move bankers said has helped boost issuance further. A bond syndicate head at a major bank said the Quota expansion sent a strong positive signal to the market and has been driving longer-dated dim sum issuance, with companies including Tencent issuing bonds with maturities of 10 and 30 years this year.

A Deep Pool of Domestic Savings Supports the Market

The market's growth is being supported by an enormous pool of savings in mainland China with limited investment options. Banks and insurers are competing for Assets to invest in as yields on Chinese Government Bonds have dropped and overall Credit demand remains weak; new bank loans declined sharply in July, the largest monthly drop since records began. Panda and dim sum bonds offer such investors a modest Yield premium, with the weighted average yield on a panda bond this year at about 1.85%, compared with roughly 1.7% on a 10-year Chinese government bond.

This type of debt remains a small part of Chinese fixed income overall, with panda bonds accounting for a quarter of one percent of the country's bond markets. Sovereign borrowers including Indonesia, Slovenia, Pakistan and Kazakhstan have tapped the panda bond market over the past year, though the bulk of the rise in issuance is being driven by Chinese and non-Chinese banks.

Multinationals Remain on the Sidelines

Despite the market's growth, renminbi-denominated debt has largely been absent from the borrowing plans of large multinational corporations this year, including US-based hyperscalers that have increasingly turned to foreign credit markets. A senior debt capital markets banker in China said a key Factor holding back larger issuers is the relatively small size of bond issuances available so far, though he expects that to change once an issuer successfully raises $1 billion, which he said would prompt others to follow quickly. Another obstacle is the extensive Due Diligence mainland institutional investors typically require before buying a foreign name, unlike Western fund managers who can often buy based on a credit rating alone.

A Currency Still Finding Its Global Footing

The renminbi's role in global finance remains limited overall, even as its use in offshore lending and trade finance has grown. Global fund managers continue to cite the currency's low yields as a reason for not increasing their allocations, even though Chinese government bonds have outperformed G7 sovereign debt since 2020.