Offshore RMB lending hit a record high, exceeding one trillion yuan, with low interest rates driving a global influx of funds.

The era of low RMB interest rates is reshaping the global financing landscape. As the interest rate differential between China and the US widens to near historical extremes, more and more international institutions and foreign governments are turning their attention to the RMB-denominated debt market, pushing offshore RMB lending to exceed one trillion yuan for the first time this year.

According to a report by the Financial Times on Tuesday, the combined issuance of "Dim Sum Bonds" and "Panda Bonds" this year has reached RMB 1 trillion (approximately US$149 billion), surpassing the total issuance for the entire year of 2018, which was already a record high. Dim Sum Bonds accounted for RMB 786.3 billion, while Panda Bonds reached RMB 231.6 billion, with the latter also setting a new single-year record.

The core driver of this trend is the sharp widening of the interest rate differential between China and the US. The yield on 10-year Chinese government bonds is currently around 1.68%, while the yield on US Treasury bonds of the same maturity is as high as 4.78%, a spread close to its historical widest, making RMB-denominated financing costs extremely low. David Yim, Head of Greater China and North Asia Capital Markets at Standard Chartered Bank, stated that issuance and investor participation in the offshore RMB bond market "have reached a frenzied level."

The interest rate differential between China and the US highlights the advantage of lower financing costs.

The attractiveness of RMB borrowing costs stems fundamentally from the deep divergence between China's monetary policy and the Federal Reserve's path. The yield on China's 10-year government bonds is approximately 1.68%, compared to the nearly 4.78% yield on US Treasury bonds, representing a spread close to its widest on record, making RMB financing significantly more cost-effective.

Against this backdrop, international banks have taken the lead. At the end of August this year, UBS completed its first Panda bond issuance, borrowing RMB 2 billion in 5-year bonds at a coupon rate of 1.78%; Goldman Sachs has issued a total of RMB 61.5 billion in Dim Sum bonds this year. Foreign banks typically convert the RMB funds raised into their primary currencies for use in global business operations.

Goldman Sachs' chief China economist, Hui Shan, drew a parallel between this phenomenon and the historical role of the yen: "Low interest rates make a currency attractive for financing purposes, and we've seen similar dynamics in Japanese history." Analysts and bankers believe that the renminbi may be in the early stages of becoming a global financing currency, similar to the role the yen played in Japan for decades.

Policy support and domestic capital pools jointly underpin the market.

This wave of issuance is not purely market-driven; the positive guidance from the policy level is equally important. This summer, the quota for domestic investors to remit funds to Hong Kong through the "Bond Connect" southbound channel was expanded. Banking professionals say this measure has significantly boosted the issuance volume.

Xixi Sun, Head of Greater China Bond Syndicate at Citigroup, said, "The expansion of the quota is a very positive signal for the market." She pointed out that the approval granted to domestic insurance companies to use the Southbound Bond Connect channel has significantly boosted the issuance of long-term Dim Sum bonds. This year, companies such as Tencent have successively issued 10-year and 30-year Dim Sum bonds.

Meanwhile, China's vast domestic savings pool continues to support the market. Against the backdrop of a sharp decline in domestic government bond yields and weak overall credit demand, banks and insurance companies are urgently seeking investable assets. In July, new bank loans in China decreased by 340 billion yuan, marking the largest monthly drop on record. Panda bonds and Dim Sum bonds offer slightly higher yields than government bonds—the weighted average yield of Panda bonds this year is 1.85%, higher than the approximately 1.7% yield of 10-year Chinese government bonds—making them a relatively preferred option for institutional investors.

Sovereign and corporate borrowers are accelerating their entry into the market, but multinational corporations remain on the sidelines.

The participation of sovereign borrowers has added diversity to the market. Indonesia, Slovenia, Pakistan, and Kazakhstan, among others, have entered the Panda bond market over the past year. Last month, Kazakhstan's national oil and gas company, KazMunayGas, completed a RMB 3.5 billion dim sum bond issuance, with Citigroup participating.

However, the participation of multinational corporations has lagged behind. Samuel Fischer, head of China's onshore debt capital markets at Deutsche Bank, pointed out that one of the main factors restricting large corporations from entering the market is the relatively small size of individual issuances. "Our clients want to know if it's possible to issue bonds worth $1 billion, and we're approaching that threshold," he said. "Once the market sees an issuer successfully complete a $1 billion issuance, new issuers will quickly follow suit."

Furthermore, attracting large domestic institutional investors to the Dim Sum and Panda bond markets also presents obstacles. David Yim stated that domestic investors "may need three to four months of due diligence before purchasing bonds issued by overseas issuers, while Western fund managers can make investment decisions based solely on credit ratings." This necessitates issuers investing heavily in marketing efforts to penetrate this investor group.

In terms of market size, Panda bonds currently account for only 0.25% of the total Chinese bond market, remaining a tiny fraction. The main drivers of this growth are still banking institutions, rather than a broader group of corporate and sovereign borrowers. Fischer stated, "We have seen very good growth, but it is primarily driven by banks." Whether the market can shift from bank dominance to a more diversified borrower structure will be a crucial test for the RMB to truly establish its status as a global financing currency.

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