HONG KONG, 16 July 2026. CSPI Ratings has today released a research report “Extended High Interest Rate Cycle, Divergent Issuance Structure of Chinese Offshore Bonds Persists”
The key takeaways from this report are as follows:
The Fed Keeps Rates Elevated; the U.S. Dollar Rebounds; the RMB Strengthens on Trade Surplus Support
We expect the Federal Reserve to maintain a restrictive policy stance in the second half of 2026. Elevated energy prices in the first half of the year pushed up headline CPI, while disinflation in core PCE goods moderated. At the same time, services and housing inflation remained sticky, and supercore services inflation stayed elevated, indicating limited scope for a meaningful slowdown in overall price pressures. Although PCE inflation may peak sequentially in the second half, we anticipate only a gradual and modest easing, leaving limited room for policy accommodation.
Labor market conditions have shifted toward low layoffs and subdued hiring. Nonfarm payroll growth remains resilient and the unemployment rate stays low, but moderating wage gains and continued weakness in PMI manufacturing employment components point to softening labor demand. Without clear evidence of inflation durably returning to target or a marked downturn, we view rapid rate cuts as unlikely.
The US Dollar Index strengthened in the first half of 2026, driven by expanding interest rate differentials amid monetary policy divergence with Europe and Japan, relatively resilient US economic fundamentals, and safe-haven demand stemming from geopolitical tensions in the Middle East. While most non-dollar currencies, including the euro and yen, weakened, the renminbi appreciated against the US dollar, underpinned by persistently large trade surpluses, diversified export industrial chains, and sustained central bank interventions to stabilize exchange rates, which eased cross-border capital outflow pressures. We expect the dollar to remain supported in second half under a restrictive Fed stance, with China’s external surplus providing partial support to the renminbi.
Issuance of China Offshore Bonds Declines; Dim Sum, Convertibles, and ESG-Themed Bonds Support Market Activity
The primary market for Chinese offshore bonds faced headwinds in the first half of 2026, with issuance volume dropping year-on-year and recording a negative net financing. Offshore issuance by local government financing vehicles (LGFVs) shrank drastically under tightened regulatory oversight, with issuances mainly from investment grade provincial governments and top-tier entities. Real estate offshore bonds remained at a trough with only a small number of state-owned property developers tapped the offshore market at low financing costs during the first half. Issuance from the financial sector edged up, with active offerings from banks and securities firms.
Despite the overall slump in primary market volume, certain sectors recorded growth. Dim Sum bond issuance jumped 38.4% year-on-year, bucking a 48% YoY decline in US dollar bond supply. Hawkish Fed rhetoric and a strong US dollar kept dollar financing costs elevated, while Dim Sum bond funding costs fell, creating a coupon spread of over 200 basis points versus US dollar bonds and underscoring the cost advantage of offshore RMB financing. Meanwhile, offshore convertible bond issuance hit a record high led by low-coupon and zero-coupon products, with internet and technology firms as dominant issuers. Institutional frameworks and infrastructure for Hong Kong’s digital bond market continued to improve, and ESG-themed offshore bonds expanded rapidly amid rising global demand for sustainable capital allocation.
Looking ahead to the second half, against the backdrop of a prolonged Fed high-rate cycle and a firm US dollar, the US dollar bond issuance is to remain sluggish. The market will be dominated by refinancing and structural adjustments. Offshore issuance is expected to become increasingly concentrated among a limited group of high-quality state-owned issuers, with financial institutions leading primary market supply. Structural divergence across sectors and issuer profiles is likely to persist.
In the secondary market, China’s offshore bond performance has remained closely correlated with US Treasury yields and geopolitical developments in the Middle East. Investment-grade bonds have shown greater resilience to price fluctuations, while high-yield instruments continue to exhibit pronounced valuation volatility. We expect secondary market conditions to remain highly sensitive to movements in US rates and shifts in geopolitical risk. Investment-grade securities should remain defensive, whereas the high-yield is likely to stay volatile, with any sustained valuation recovery contingent on concurrent improvements in underlying credit fundamentals and broader risk appetite.
Note: This report is translated from the Chinese version. In case of any discrepancies, the Chinese version shall prevail.Contacts
Primary Analyst
Winnie Guo
+852 3615 8344
Secondary Analyst
Siqi Lin
+86 755 83210225
Committee Chair
Larissa Wu
+852 3615 8317
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