China’s offshore yuan has solidified its position as a widely tapped currency in institutional and corporate financing on the back of a yuan-denominated payments surge and ambitious initiatives in the currency’s top trading hubs.

Last year was a sizzling one for the offshore yuan market. Offshore yuan-denominated bond issuance volume, according to People’s Bank of China ( PBoC ) data, was 1.5 times higher than 2023, with the loan balance hitting a record level at 700 billion yuan ( US$96 billion ). Offshore yuan savings in Hong Kong also surged to a historical high of 1 trillion yuan.

Hong Kong – accountable for 75% of global offshore yuan settlement – continues to take the lead and double down on its commitment to foster offshore yuan lending. Yuan financing activities in Hong Kong during the first half of 2024 reached 1.6 trillion yuan, according to the Hong Kong Monetary Authority ( HKMA ), up from 1.38 trillion yuan in 2023 and 1.1 trillion yuan in 2022.

Local players, ranging from private corporates to governments, have stepped up to maximize the potential of the currency. In 2024, Hong Kong’s public metro system – the Mass Transit Railway Corporation – issued its first offshore yuan green bond with an unprecedented tenor length of 30 years. Alibaba made its debut in the offshore yuan market with a 17-billion-yuan bond programme. And the Hong Kong government added to the flow with its first 20- and 30-year offshore yuan green tranches, marking two of the largest and longest sovereign offshore yuan bonds in 2024.

With offshore yuan liquidity deepening, the currency is capturing interest from issuers overseas. Super sovereign wealth fund Temasek, known as the Singapore government’s investment arm, launched a 1-billion-yuan 10-year bond, a 1.7-billion-yuan 30-year bond and a 750-million-yuan five-year bond in 2024. All three deals demonstrated the city-state’s enthusiasm for the offshore yuan market and represent a strategy of branching out to longer tenors, something previously not done by any overseas issuer.

The momentum in offshore yuan financing is likely to carry on this year. In addition to the currency’s favourable rates providing lower funding costs, the demand for international yuan investment is being raised by higher-than-ever volumes cross-border payments, with transactions in the currency, between January and August 2024, totalling 41.6 trillion yuan, up 21% over the same period last year.

Notably, the PBoC is planning a 100-billion-yuan bond programme in Hong Kong, which was announced at the recent Asian Financial Forum, that is designed to leverage on the sizable investment appetite for the currency.

As well, Hong Kong, being the currency’s major offshore hub, is doing its bit to advance the yuan’s internationalization. Low-cost short-term yuan funding will be available to Hong Kong banks through a 100-billion-yuan RMB Trade Finance Liquidity Facility being rolled out by the HKMA. The programme will offer repo transactions and currency swaps to enhance the offshore yuan’s liquidity.

Outside Hong Kong and China, capital initiatives with other countries are in place to facilitate yuan-denominated trades. Singapore has demonstrated its green commitment with China via new green finance and capital markets initiatives involving the alignment of green taxonomies, “over-the-counter” bond trading and the allowance of panda bond listings on the Singapore Exchange.

Growing investment demand and overseas optimism, along with existing capital demand from local issuers, are set to continue the trend of increased offshore yuan use.