Offshore bonds to give China lifers a yield lifeline

Expansion of Bond Connect scheme will provide higher yielding assets for life insurers, and may ease concerns over asset-liability management.

7 May 2026

13 mins

Corporate & investment bankingGlobal Markets

This article was originally published on risk.net.

One of the trickiest tasks for life insurers is matching the duration of assets and liabilities. Few firms achieve a perfect match: indeed, the average duration gap for life insurers in developed economies is two years. Not ideal, but manageable.

According to industry estimates, the duration gap for Chinese lifers is a startling seven years.

Closing the gap has become progressively harder for firms in China. Their fixed income assets are predominantly in onshore Chinese government and bank bonds. Longer-dated bonds are scarce and yields have been falling.

Now an offshore escape route is opening. Last July, China’s financial authorities expanded eligibility for the Southbound Bond Connect scheme to include insurance companies, alongside securities houses, fund houses and wealth managers. When insurers get the final greenlight, they will be able to access higher yielding offshore renminbi(CNH) bonds in Hong Kong.

“Onshore yields are so low,” says Danny Luo, head of CNH and Hong Kong dollar bond trading at Standard Chartered. “The CNH market can provide life insurers with a good alternative.”

When the regulatory approval comes, dealers expect it to reshape the offshore renminbi bond market. China’s life insurers held 34.7 trillion yuan (USD4.43 trillion) in assets at the end of last year. Official data shows that more than half is allocated to bonds.

“What I’m hoping is, with the insurers coming online, they would be able to develop a longer tenor part of the (USD/CNY cross-currency swap) curve. I think easily it can be out to 20, 30 years, and liquidity should gradually build up as the volume builds up,” says the US bank’s sales head.

Mind the gap

The mismatch at the heart of Chinese life insurance is straight forward. Liabilities from payouts on insurance policies and investment products need to be funded by assets. Accordingly, the interest rate sensitivity, or duration, of the assets and liabilities must match as closely as possible so they’re not impacted differently by rate movements.

Chinese insurers are somewhat unique as the vast majority of their fixed income assets are locally sourced, whereas in other jurisdictions like Taiwan and South Korea, there is widespread use of US dollar-denominated securities.

Insurer liabilities are long dated, but the onshore bond market offers limited supply beyond the 10-year point, and the longest liquid China government bond (CGB) tenor – the 30-year – still leaves a gap against the longest liabilities.

An August 2025 research note from Zhongtai Securities said the average duration gap is seven years, with some small and medium-sized insurers running gaps of nearly 10 years. It said the duration gap was expected to widen in the short term due to an influx of new insurance products continually extending maturity of its liabilities, and low rates limiting investment in long-dated bonds. But in the longer term, Zhongtai expects the gap to narrow.

Regulators have acted to limit insurers’ duration gap. In a draft regulation released in December, the National Financial Regulatory Administration (NFRA) required insurers to contain their duration mismatch within a range of −5 to +5 years. When the duration of liabilities exceeds that of assets, the gap is termed negative.

However, firms have struggled to tackle the mismatch. In a 2023 filing to the US Securities and Exchange Commission, China Life explained that managing its duration gap was difficult due to the limited availability of long-duration investment assets in the country, and the fact that there are “only very limited financial derivative products for us to hedge our interest rate risk”.

Insurers have increased their net purchase of longer-dated bonds in recent years, reaching 2.24 trillion yuan of bonds with tenors of more than 10 years in 2025, about 64 per cent of their net bond purchases across all tenors, analysis from Founder Securities shows.

For some firms, this has had the desired effect. For example, Ping An reduced its duration gap to under three years in 2024 from 8.6 years in 2013, through a strategy of long-duration CGBs and risk assets.

The People’s Bank of China has cut rates repeatedly in recent years, pushing the 10-year CGB yield from just under 4 per cent at the start of 2018 down to 1.8 per cent as of March 5. Falling rates lowers the discount rate for future liabilities, pushing up their present value. A negative duration gap causes the present value of long-dated liabilities to rise faster than asset values, putting pressure on solvency ratios. A January 30 Bloomberg report said China is considering selling USD29 billion of special government bonds to capitalise some of its largest insurers.

Fixing the duration gap is harder when rates are low. Many insurance policies include an investment element that offers a minimum return, and so yields on insurers’ assets need to exceed that. Some legacy investment products offer returns of around 3 per cent–3.5 per cent, according to 2023 data from Fitch Ratings. The 30-year CGB was yielding 2.34 per cent as of March 9.

Hungry for dim sum

In a quest to find better yields and close the duration gap, Chinese insurers are looking to Hong Kong’s dim sum market – bonds denominated in CNH and settled outside mainland China, usually in Hong Kong.

The dim sum market has surged in recent years. In a speech in September last year, Hong Kong Monetary Authority chief executive Eddie Yue said the outstanding amount of dim sum issuance had grown by 60 per cent over the previous three years to hit 1.27 trillion yuan in the first half of 2025. But volumes are dwarfed by the onshore market, which stood at 79.3 trillion yuan for the year 2024, according to official data.

For issuers who are seeking access to US dollars, it’s cheaper to issue in renminbi and use cross-currency swaps than to issue a US dollar bond.

For investors onshore, the attraction is also clear: the CNH market trades at a premium to the onshore market, due to its smaller size and lower liquidity. For instance, a 10-year onshore CGB issuance in mid-February had a 1.75 per cent coupon, compared with 1.87 per cent for its offshore equivalent, according to Bloomberg data. In 2025 to May, the average yield for onshore investment grade bonds was 1.64 per cent, while offshore in the dim sum market it was 2.29 per cent, research from FTSE Russell shows.

This kind of yield boost is appealing to life insurers that need to match their liabilities.

One of the main ways to diffuse financial risk has been to make sure that they get enough returns to cover their liabilities, and the CNH market is one that can provide them a very good alternative, without taking on FX risk, because those issuers just issue in CNH.

Danny Luo

Head, CNH and Hong Kong dollar bond trading, Standard Chartered

Offshore (CNH) issuances give a good diversity of quality issuers and yield premium-Quote, says John Luk, Crédit Agricole CIB.

But insurers aren’t restricted to buying CGBs. Only 14 per cent of the offshore CNH bond market issuance is classed as government debt, and comes from development banks, Chinese provinces and supranationals. The majority, 64 per cent, is from financial firms, with the rest coming from corporates.

“The life insurers will definitely buy the longer-dated bonds offshore, because at the long end, the gap between offshore and onshore yield is tremendous,” says Danny Luo.

However, average duration in the offshore market is smaller, at 3.67 years on average compared with 5.1 in the onshore market, FTSE Russell states.

Beyond the yield pickup, the offshore credit structure can be different from the onshore version. Celine Luo, Head of Structuring for Greater China and North Asia at Standard Chartered in Hong Kong, says the onshore credit curve is “effectively tight, with only a few basis points of rate difference between major Chinese banks and a second-tier or lower-rated local banks”.

She adds: “In the offshore market, pricing is far more differentiated across bank-issued certificates of deposit, long-tenor notes, total loss-absorbing capacity instruments, additional tier one and tier two bonds, with spreads reflecting the credit quality of the issuer and issuance ranking.”

The offshore market also gives onshore investors access to a much broader range of issuer base. For foreign entities to issue CNY-denominated ‘panda’ bonds onshore requires multiple regulatory approvals and substantial legal costs, which has limited the supply of non-Chinese credits in the domestic market.

The existing route for mainland insurers to invest offshore is the Qualified Domestic Institutional Investor (QDII) programme, under which eligible institutions receive pre-approved quotas. By the end of January 2026, insurers held a combined QDII quota of USD39.32 billion.

But Danny Luo at Standard Chartered says these quotas tend to be reserved for higher-yielding assets such as US dollar-denominated bonds or equities, rather than CNH bonds.

Heading to Hong Kong

The Southbound Bond Connect, which launched in September 2021, initially allowed a select group of banks to buy bonds in Hong Kong through a link between the onshore central securities depository Shanghai Clearing House and its Hong Kong counterpart. The flows do not count towards QDII allocations.

The People’s Bank of China and Hong Kong Monetary Authority last July widened access to the scheme to non-banking financial institutions. While securities houses, fund houses and wealth managers have started using Southbound Bond Connect, insurers have yet to receive the go-ahead from their regulator. The timing of the final approval for insurer participation remains unknown.

Even without insurers, Southbound Bond Connect flows have grown rapidly. By the end of November 2025 – the latest disclosure from Shanghai Clearing House – bonds held by onshore institutions through the scheme had reached 655 billion yuan, up 30 per cent from a year earlier.

Davy Tsang, head of rates investor sales for Asia North, Australia and Asia South at Citi, says the pickup in flows reflects a broader search for yield by onshore institutions.

“Historically, renminbi yields have always been higher than G10 counterparts, whereas right now we are on the other side of the equation,” he says.

Tsang says the July expansion was explicitly designed to deepen the offshore curve and encourage more demand, which will lead to more issuance from foreign borrowers.

“The goal is very obvious: further renminbi internationalisation, further development of the CNH and Hong Kong dollar curve, and to attract more foreign issuers to the CNH and Hong Kong dollar market, so that China participants can invest,” he says.

The effect on the shape of the yield curve has been pronounced. The US bank’s sales head says that before Southbound Bond Connect, the “longer part” of the offshore curve meant two to five years. South bound demand has pushed reasonable liquidity out to 10 years.

Foreign issuers, typically banks, also tend to use cross-currency swaps to convert their CNH proceeds into US dollars. Traders say that when insurers come online and more issuers come to service that demand, that will extend the cross-currency curve to 20 or 30 years.

Danny Luo says some securities firms had been buying longer-dated bonds in anticipation of the Southbound expansion, and that the trade had performed well as long-end yields had fallen substantially.

While technically onshore firms can buy foreign currency bonds through South bound Bond Connect, dealers say existing flows have been overwhelmingly in CNH, and they expect this to remain the case for insurers.

“I think FX stability is very important – if you keep everything in CNH, it doesn’t affect the USD/CNH exchange rate as much,” says the US bank’s sales head.

John Luk, head of linear FX and emerging market rates trading for Asia-Pacific and Middle East at Crédit Agricole Corporate & Investment Bank, agrees that the largest share of volumes will be in CNH. “The US dollar will only be a very small amount,” he says. “Our observation is that investors mainly look to invest in CNH issuances given the composition of their balance sheet. Offshore issuances give a good diversity of quality issuers and yield premium.”

Call the shots

When insurers gain approval to take part in Southbound Bond Connect, dealers expect most interest to be in callable bonds. When an investor buys a callable bond, they are effectively selling the issuer an embedded option to redeem early. This comes with premium on top of the offshore boost – for example, a five-year Goldman Sachs CNH bullet bond issued in early February had a coupon of 2.45 per cent, compared with a callable bond with a non-call period of one year at the same maturity from the US bank that had a coupon of 2.68 per cent.

Traders report that the typical yield pickup for a five-year callable bond with a non-call period of one year is around 15 basis points compared with a bullet bond of the same maturity. Likewise, a 10-year callable with one-year non-call has a 20bp yield pickup over the 10-year bullet version.

Callables make up a significant portion of offshore issuance: CNH bond issuance was 86.5 billion yuan in the year to February 11, of which 25.9billion yuan was callable notes, according to Standard Chartered. Dealers have noticed a significant increase in demand for callable structures under the Southbound scheme.

Tenors have also been evolving. In 2023, all bank-issued callable dim sum bonds had maturities under five years. In 2025, total issuance of callable dim sum bonds by banks with final maturities beyond seven years exceeded USD1 billion.

The maturity is still capped at 10 years in most of bank dim sum issuances, as CNH volatility is almost unhedgeable above this tenor at the moment.

Celine Luo

Head of Structuring for Greater China and North Asia, Standard Chartered

That hedging constraint is the option embedded in every callable transaction. As bank issuers of callables use USD/CNH cross-currency swaps to convert the bonds back to USD, the optionality is linked to cross-currency swaps, not plain vanilla interest rate swaps like a regular callable.

There are buyers of cross-currency swap options, but it’s not considerable two-way market, especially at longer tenors, meaning risks can buildup. As a result, many dealers delta-hedge the options with cross-currency swaps dynamically instead, which can be tricky further out on the curve where there’s little liquidity.

“I don’t think people are actively trading (the options),” says the US bank’s sales head. “If you want to get a quote you can, but mostly dealers are trying to risk-manage and delta-hedge, rather than vol-trade. It is developing, but still in the early stages.”