September 15, 2025
The Great Divergence - How China's Domestic Deflationary Pressures are Fueling an Unprecedented Boom in the Offshore Bond Market
Section 1: Executive Summary (TL;DR)
This report aims to dissect a core phenomenon: China’s persistent domestic economic challenges, particularly deflationary pressures and weak domestic demand, have forced its monetary policy into a great divergence with the Western world. This divergence has created a powerful cost-driven incentive for both Chinese and foreign corporations to issue bonds in the offshore RMB (CNH) market, thereby igniting a record-breaking issuance boom in the so-called “Dim Sum bond” market.
The key signals identified in this report are as follows:
The Paradoxical Strength of the Offshore RMB Bond Market: The prosperity of the offshore RMB (CNH) bond market is paradoxically rooted in the weakness of mainland China’s economy. An accommodative domestic monetary environment and sluggish financing demand have pushed low-cost capital into the offshore market.
The Strategic Pivot of Chinese Tech Giants: Tech giants, represented by Tencent, are strategically shifting towards RMB-denominated financing channels. This move is not only to reduce financing costs but also to lower their dependence on the US dollar while funding future growth (such as in artificial intelligence), thereby mitigating exchange rate and geopolitical risks.
A New Phase of RMB Internationalization: The current trend marks the entry of RMB internationalization into a more mature, market-driven phase. Unlike in the past, when it was primarily policy-driven, the current attraction stems from tangible economic benefits—namely, a significant financing cost advantage.
The Rise of a Non-USD Financing Alternative: The Dim Sum bond market is increasingly becoming an important non-USD financing option for a diverse range of global issuers, providing them with a diversified source of capital.
Section 2: Macroeconomic Divergence: China’s Deflationary Pressures and the Global Interest Rate Environment
2.1 The Core Issue: Deflationary Headwinds and “Quasi-Deflationary” Pressures
The macroeconomic foundation of the current situation stems from the widening monetary policy gap between China and major developed economies. Although, strictly speaking, the Chinese economy has not fallen into “full-blown deflation,” the immense deflationary pressure it faces has compelled policymakers to adopt a sustained accommodative monetary policy.¹
In response to a weak real estate market, sluggish consumption, and near-zero inflation, the People’s Bank of China (PBoC) has repeatedly lowered the reserve requirement ratio (RRR) and policy interest rates, aiming to create a more accommodative monetary environment for economic recovery.² Analysis indicates that while the current price declines are considered temporary and structural, the economy is indeed facing “quasi-deflationary” pressures such as insufficient demand and weakening expectations.¹
This policy stance stands in stark contrast to the tightening cycles undertaken by the U.S. Federal Reserve and other major central banks since 2022 to combat high inflation.³ It is this “great divergence” in global monetary policy that has laid the groundwork for the boom in the offshore RMB bond market.
2.2 Deconstructing Economic Weakness: Demand, Oversupply, and Blocked Transmission
China’s economic difficulties stem from three interrelated factors that collectively explain why Beijing must maintain an extremely accommodative policy stance.
First is severe demand deficiency. Due to slowing income growth and falling asset prices in real estate and stocks, household consumption confidence is weak, leading to a continued reluctance to spend compared to pre-pandemic levels.¹ On the investment front, the debt pressures on local governments have limited the expansion of infrastructure construction, while the deep recession in the real estate sector has led to significant declines in related investment for two consecutive years.¹
Second is industrial oversupply. This problem exists not only in traditional sectors like cement and building materials but has also spread to emerging strategic industries such as photovoltaics and lithium batteries. Excessive capacity expansion has put continuous downward pressure on producer prices for industrial goods.¹
Most critical is the blocked monetary policy transmission. A key indicator is the widening “scissor gap” between the growth rates of broad money supply (M2) and narrow money supply (M1).¹ High growth in
M2 indicates ample liquidity within the financial system, but the low growth in M1 (which mainly includes corporate demand deposits) signifies that these funds are not effectively flowing into the real economy for immediate spending or investment. This reflects a situation where funds are “pooling” or “idling” within the financial system, weakening the effectiveness of accommodative monetary policy in stimulating domestic demand. As traditional monetary policy tools prove less effective, the central bank is forced to maintain a more accommodative liquidity environment. This excess liquidity naturally spills over into financial markets, thereby depressing bond yields. Therefore, the boom in the Dim Sum bond market can be seen as an unintended consequence of a domestic policy transmission dilemma. Simultaneously, the struggles of China’s domestic economy are paradoxically driving the deepening and development of its offshore capital market. Due to weak domestic credit demand, excess liquidity and low interest rates have created a highly attractive supply environment for international borrowers, thereby strengthening Hong Kong’s position as a global RMB hub.
Section 3: The Renaissance of the Dim Sum Bond Market: A Haven for Low-Cost Capital
3.1 Market Definition and Mechanics
Dim Sum Bonds are bonds issued outside of mainland China (primarily in Hong Kong) and denominated in offshore RMB (CNH).⁵ This contrasts with “Panda Bonds,” which are bonds issued by foreign entities in China’s onshore market and denominated in onshore RMB (CNY).⁷
Understanding the difference between offshore RMB (CNH) and onshore RMB (CNY) is crucial. The exchange rate of CNY is strictly guided by the PBoC’s daily central parity rate, whereas the CNH exchange rate is primarily determined by market supply and demand, better reflecting international market sentiment and expectations, making it a key economic weather vane.⁹
3.2 Quantifying the Market Boom
Data clearly shows that the Dim Sum bond market is experiencing an unprecedented issuance boom.
In the three years leading up to the end of 2024, the annual issuance volume of Dim Sum bonds tripled, reaching CNH 1.7 trillion (approximately USD 235 billion) in 2024 alone.⁴
According to the Hong Kong Monetary Authority, the total new issuance of CNH debt securities in Hong Kong increased by 18.2% year-on-year in 2023, reaching CNH 785.8 billion.¹¹
This momentum accelerated further in the first half of 2024, with issuance volume surging by 93% year-on-year.¹² By March 2025, the year-to-date issuance had exceeded CNH 250 billion, a 13% increase from the same period last year.¹³
Table 1: Annual Issuance Volume of Dim Sum Bonds (2020-2024)
| Year | Total Issuance (CNH 100 million) | Key Drivers | |
|---|---|---|---|
| 2020 | ~4,000 | Early post-pandemic economic recovery | |
| 2021 | ~6,000 | RMB appreciation expectations | |
| 2022 | ~9,000 | Divergence of China-US monetary policies begins | |
| 2023 | 11,734 | Significant widening of interest rate differentials | |
| 2024 | 17,000 | Record-low financing costs | |
| Note: Data is estimated based on multiple sources to illustrate the trend.⁴ |
3.3 The Irresistible Cost Advantage
The core driver of the market boom is the significant interest rate differential. The monetary tightening by major global central banks and China’s accommodative monetary policy have led to a historic rate inversion. Currently, U.S. Treasury yields have a premium of about 2% to 3% over Chinese government bonds.⁴ This allows companies to save as much as 150 to 250 basis points (1.5% to 2.5%) annually on financing costs by issuing RMB bonds compared to directly issuing USD bonds.⁴ Borrowing costs in the offshore market have fallen below 2%, the lowest level since 2013.
Table 2: Comparison of Investment-Grade Corporate Bond Yields (3-Year, Illustrative)
| Bond Type | Representative Yield | Comments | |
|---|---|---|---|
| Offshore RMB (CNH) Bond | 2.5% | At a historical low due to China’s accommodative monetary policy. | |
| US Dollar (USD) Bond | 5.0% | At a high level due to interest rate hikes by the U.S. Federal Reserve. | |
| Note: Yields are illustrative to demonstrate the cost difference.⁴ |
This issuance boom is not just due to low interest rates but is also supported by the maturing market infrastructure. Policy initiatives such as the “Southbound Bond Connect” are bringing institutional investors from mainland China into the Hong Kong market, providing a stable and deep source of liquidity for Dim Sum bonds.¹² Furthermore, the narrowing of bid-ask spreads and more frequent benchmark bond issuances by the Chinese Ministry of Finance and the Hong Kong SAR Government have significantly enhanced market liquidity and pricing efficiency, indicating that the market’s growth has a sustainability that transcends short-term interest rate arbitrage.⁴
Section 4: A Tale of Two Issuers: Decoding Corporate Motivations
4.1 The Pivot of Chinese Corporations: Risk Aversion and Strategic Financing
For Chinese companies like Tencent, choosing to issue CNH bonds is driven by multiple strategic considerations.
Cost Savings: The most direct motive is to lock in the lowest borrowing costs since 2013.
Currency Matching: For companies whose revenues are primarily in RMB, issuing RMB-denominated debt eliminates the inherent currency mismatch risk associated with USD debt, which is particularly important in the current environment of heightened exchange rate volatility.¹⁵
Geopolitical Risk Hedging: Reducing reliance on USD financing helps companies mitigate the risk of financing disruptions that could arise from U.S.-China tensions or changes in U.S. capital market access policies.
Stockpiling Funds for Future Growth: The proceeds will be used not only for refinancing but also for investment in capital-intensive strategic areas like artificial intelligence to ensure the company’s long-term competitiveness.¹⁶
4.2 The Arbitrage Opportunity for Foreign Issuers: Cost, Access, and Operations
The Dim Sum bond market is equally attractive to non-Chinese issuers.
Pure Cost Arbitrage: The primary motivation is to issue low-cost RMB bonds and then convert the proceeds into USD or EUR through cross-currency swaps. The final all-in financing cost is far lower than issuing bonds directly in the USD or EUR markets.¹²
Funding for China Operations: Multinational corporations with substantial operations in China can use the proceeds from Dim Sum bonds to directly support their onshore activities, thereby bypassing China’s capital controls and exchange rate risks.¹⁷
Diversification of Investor Base: Entering the CNH market means gaining access to a new, deep, and growing pool of capital, including mainland Chinese institutional investors participating through the “Bond Connect”.⁸
While the motivations of these two types of issuers differ, they form a complementary market ecosystem. The issuance of bonds by high-quality Chinese companies like Tencent helps build market depth and investor confidence. Meanwhile, the participation of foreign issuers, especially their arbitrage activities, promotes the development of related financial derivatives markets (such as currency swaps). This symbiotic relationship jointly accelerates the maturation and perfection of the entire offshore RMB ecosystem.
Section 5: Case Study – Tencent’s Strategic Return
5.1 Background: The End of a Four-Year Silence
Tencent’s planned issuance of offshore RMB notes is its first public bond sale since 2021 and its first-ever issuance of Dim Sum bonds. This move marks a significant shift in the company’s financing strategy.¹⁵
5.2 The Dual Drivers: Refinancing and Strategic Investment
Tencent’s motivation for this bond issuance is clear and explicit, combining tactical necessity with strategic foresight.
On a tactical level, pressing refinancing needs are imminent. The company faces two upcoming USD-denominated debt maturities that must be refinanced. Using lower-cost CNH bonds to repay maturing USD debt is a shrewd financial maneuver.¹⁵
Table 3: Tencent’s Upcoming USD-Denominated Debt Maturities (2025-2026)
| Maturity Date | Principal Amount (USD) | |
|---|---|---|
| April 2025 | 500 million | |
| January 2026 | 1 billion | |
| Source: ¹⁵ |
On a strategic level, it is about stockpiling ammunition for the AI race. Tencent is increasing its investment in artificial intelligence R&D to cope with intensifying domestic and international competition. A new round of RMB financing will provide ample “ammunition” for its AI roadmap without putting excessive pressure on its balance sheet.¹⁶ Furthermore, the inclusion of multiple tenors such as 5-year, 10-year, and 30-year notes indicates that Tencent is formulating a long-term capital strategy that extends beyond short-term refinancing needs.¹⁵
As a leading enterprise in China’s tech industry, Tencent’s choice to issue its first Dim Sum bond is a powerful market signal in itself. This move not only validates the depth and attractiveness of the offshore RMB market to support the strategic financing needs of large corporations but is also highly likely to encourage other high-quality Chinese companies to follow suit, thereby further consolidating and accelerating this market trend.
Section 6: The Composite Signals: Key Takeaways for Investors and Policymakers
6.1 Signal One: Market-Driven RMB Internationalization
The current Dim Sum bond boom represents a newer and more sustainable phase of RMB internationalization. Unlike earlier stages that relied heavily on policy pushes or unilateral appreciation expectations, the foundation of this boom is a compelling, rational economic incentive—a significant and sustained capital cost advantage.²² This adoption model, driven by endogenous market forces, is more robust and signals the maturing role of the RMB as a global financing currency.¹⁴
6.2 Signal Two: The Rise of a Geopolitical and Financial Hedging Tool
This trend has profound strategic implications. For Chinese companies, the ability to raise large-scale RMB funds in the offshore market provides an important layer of hedging against the U.S.-centric financial system and potential geopolitical risks. For international corporations and investors, a liquid and deep CNH bond market offers a meaningful diversification option outside the USD-dominated global financial system. The growth of this market is a microcosm of the evolution of the global financial architecture towards a more multipolar configuration.
6.3 Signal Three: The Investor Outlook – Opportunities and Risks
Finally, a balanced perspective for investors.
Opportunities: Investors can gain exposure to high-quality Chinese corporate credit assets through the Dim Sum bond market, potentially earning higher yields than onshore RMB bonds, and achieving portfolio diversification.⁴
Risks:
Credit Risk: The standard risk of issuer default remains, especially for bonds issued by some Local Government Financing Vehicles (LGFVs) that offer extremely high coupons.⁶
Interest Rate Risk: China’s low-interest-rate environment is not permanent. A shift in the PBoC’s policy stance could impact the market price of existing bonds.⁶
Exchange Rate Risk: For overseas investors, if the CNH depreciates against their home currency, it could erode or even offset coupon returns.¹⁰
Policy Risk: The market’s attractiveness is highly dependent on China’s current macroeconomic policies and capital account management regulations. Any sudden policy change could fundamentally alter the market’s dynamics.
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