According to a report published by HSBC Global Research this month, as of the first half of this year, there has been 23 billion yuan (HK$26.1 billion) of offshore yuan-bonds issued in Hong Kong.

The market size of offshore yuan-denominated bonds relative to deposits was relatively modest - at the end of May, the total amount of yuan deposits was 53 billion yuan. The bonds were mostly held by retail investors and banks, which are the dealer-brokers, according to Zhang Zhi-ming, a Hong Kong-based director at HSBC Research.

Mr Zhang estimated that about 50 per cent of the past issuance was held by retail investors, 40 per cent was with the banks and the rest stayed with other approved institutional investors. 'Only very recently have companies been able to register with a yuan account,' said Mr Zhang. 'Previously they were not allowed to settle in yuan.'

HSBC's research estimated the trial renminbi trade settlement scheme could lead to an annual surplus of 140 billion yuan offshore. Most bondholders have taken the buy-and-hold approach, meaning there is little supply of securities in the secondary market.

Unless there are frequent and large volumes of bonds being issued, market participants do not envisage progress in establishing a liquid offshore yuan-denominated bonds market. If anything does happen, it is likely to be after the issuance of a most wanted benchmark set by the People's Bank of China (PBOC). In April, the State Council said that the Ministry of Finance might issue offshore sovereign bonds.

Bondholders can compare the performance of corporate bonds against the benchmark bonds, typically issued by government or government bodies. But given that there was a trade flow of three trillion yuan last year, there was a strong appetite for yuan-denominated products.

One way for exporters and importers to use their yuan surplus is to invest in the onshore yuan-denominated market. The size of the offshore yuan-denominated bond market is lower than the more established onshore yuan-denominated bond market, said Hong Kong-based Frances Cheung, fixed income strategist at Standard Chartered Bank.

Ms Cheung said the onshore bond market had grown but the liquidity remained thin.

The total amount of outstanding onshore government bonds issued is about 5.3 trillion yuan, excluding PBOC bills worth about 4.2 trillion. There have been about 4.9 trillion corporate bonds issued and a total of 4.4 trillion bonds issued by the Ministry of Finance. The mainland might not be prepared to allow foreign investors access to its onshore bond market because this would mean it would have to open up its capital account and liberalise the renminbi interest rate. Since the onshore interest rates are lower than the offshore interest rates, opening up the onshore market at his point would introduce arbitrage opportunities.

The only option that exporters and importers have is to invest their yuan surplus in offshore yuan-denominated bonds. This would benefit subsidiaries of local banks which have been expanding their lending businesses on the mainland and are in need of a stable source of funding in yuan.

'In order to offer yuan-denominated loans, they need a stable source of funding in yuan. We expect to see more yuan-denominated bonds issuance by these banks to broaden their yuan funding source,' said Ryan Tsang, senior director of corporate and financial institution ratings at Standard & Poor's.

The Chinese banking regulator sets a minimum loan-to-deposits ratio of 75 per cent for all commercial banks operating on the mainland.

Mr Tsang said most foreign banks' Chinese subsidiaries, which had received a licence to lend on the mainland, have yet to meet this requirement. 'These banks have a five-year grace period to meet the loan-to-deposits ratio. These banks, in general, do not have a strong retail deposits base,' said Mr Tsang.