Wall Street piles into Hong Kong’s dim sum bonds despite fading yuan funding edge: BofA

Wall Street banks are increasingly turning to Hong Kong's offshore yuan bond market, even as the currency's traditional funding advantage over the dollar diminishes. According to a Bank of America report, issuance of offshore yuan-denominated bonds, known as dim sum bonds, reached 774 billion yuan (US$116 billion) by October 20, a 68% increase from the previous year.

Financial institutions accounted for 57% of total supply, with issuance from the sector rising 139% year-on-year. US banks led the surge, raising 167 billion yuan, a 130 billion yuan increase from a year earlier. The rise in offshore Chinese capital has fundamentally changed the rationale behind yuan issuance, as the bank noted.

The question now is how quickly regulators will expand offshore yuan capital pools. The market is also expanding as China's offshore US dollar bond market shrinks, with offshore yuan bonds becoming the third-largest funding currency for US global systemically important banks after the US dollar and the euro. Demand from mainland Chinese investors is fueling the expansion, with holdings through the southbound Bond Connect scheme reaching 1 trillion yuan, a 85% year-on-year increase.

Nearly 30% of dim sum bonds issued this year have an average life exceeding seven years, with Chinese technology companies tapping the market for AI financing. China is projected to invest $1.5 trillion in AI-related capital expenditure between 2026 and 2030, with over 75% of technology-sector yuan bonds having maturities of more than seven years.

Future growth will depend on Beijing's willingness to expand channels for mainland money to flow offshore, with authorities raising the annual southbound Bond Connect quota to 800 billion yuan from 500 billion yuan.