Hong Kong’s offshore yuan bond market is becoming an increasingly important funding source for global banks, with US lenders driving a surge in issuance even as the currency’s traditional funding advantage over the dollar narrows.

The shift offers a glimpse of how financial ties between Wall Street and China are evolving despite geopolitical tensions. For US banks, the attraction increasingly lies in access to Chinese capital rather than lower borrowing costs.

Offshore yuan-denominated bonds, known as dim sum bonds, reached 774 billion yuan (US$116 billion) in issuance as of October 20, up 68 per cent from a year earlier, according to a Bank of America (BofA) Global Research report on Wednesday. Financial institutions accounted for 57 per cent of total supply, with issuance from the sector rising 139 per cent year on year.

Foreign financial institutions issued 333 billion yuan of bonds, up 169 per cent from a year earlier and more than double their average annual issuance between 2022 and 2025. US banks led the surge, raising 167 billion yuan, an increase of 130 billion yuan from a year earlier.

US global systemically important banks have raised the equivalent of US$22 billion through offshore yuan bonds this year, making the yuan their third-largest funding currency after the US dollar and euro, overtaking the sterling, BofA said.

The surge has continued despite a fading cost advantage. At the end of September, yields on three-year yuan government bonds, after currency hedging, were only about 0.1 percentage points below comparable US Treasury yields, the bank said. The rise of offshore Chinese capital had “fundamentally changed the rationale” for yuan issuance, it added.

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 expandBofA Global Research The market was also expanding as China’s offshore US dollar bond market shrunk, having contracted to about US$400 billion from its 2021 peak, amid a collapse in property-sector issuance and corporate deleveraging, according to the report.

The outstanding dim sum bond market reached 1.9 trillion yuan, or about US$284 billion, nearly quadrupling from the end of 2021 and growing to about 70 per cent of the size of the offshore dollar market, the bank said. Demand from mainland Chinese investors is supporting the expansion.

Holdings through the southbound Bond Connect scheme – which allows mainland investors to access Hong Kong’s offshore bond market – reached 1 trillion yuan at the end of August, up 85 per cent year on year, after authorities broadened participation by institutional investors, BofA said. Nearly 30 per cent of dim sum bonds issued this year had an average life exceeding seven years.

Chinese technology companies are also tapping the market to finance investment in artificial intelligence. Their offshore yuan issuance rose to 57 billion yuan this year, broadly matching their US dollar bond issuance.

BofA estimated that China would need to invest US$1.5 trillion in AI-related capital expenditure between 2026 and 2030, including about US$900 billion by major internet platforms.

More than 75 per cent of technology-sector yuan bonds issued this year had maturities of more than seven years, the report said.

Future growth will depend partly on Beijing’s willingness to expand channels for mainland money to flow offshore. Authorities have raised the annual southbound Bond Connect quota to 800 billion yuan from 500 billion yuan after the previous limit was nearly exhausted.

The new quota was equivalent to more than 40 per cent of the existing dim sum bond market, BofA said, making policy decisions a key determinant on future growth.