A Chinese property developer's recent record-breaking bond issue highlighted soaring demand for ways to play appreciation of China's currency. It also underscores the limits of China's nascent efforts to create an international market for the yuan in Hong Kong.

Evergrande Real Estate Group Ltd.'s $1.4 billion bond issue, priced a little more than a week ago, was Asia's biggest high-yield corporate debt deal ever. But what made it especially noteworthy was its structure as a synthetic yuan bond.

These debt instruments, which are denominated in yuan but traded using dollars, have become a hot spot in the global market for emerging-world debt, eclipsing, at least for now, the rise of "dim sum bonds." Those Hong Kong-issued yuan bonds are bought and sold in yuan, and took off last year amid a push by China to internationalize use of its currency, which is also known as the renminbi.

Since Dec. 15, new issuers, all of them Chinese property developers incorporated offshore, have sold nearly $2.7 billion worth of synthetic yuan bonds. In the same period, only $648 million of new dim sum bonds were sold.

There's no mystery why investors like synthetic yuan debt. Amid widespread consensus that China's currency will continue to appreciate against the dollar, at least for the next several years, this gives investors a new way to play that trade while earning yields on the bonds that are much better than what they would get on dim sum bonds.

For instance, Evergrande's three-year bond offered a coupon of 7.5%. The highest coupon on a dim sum bond so far, 4.625%, was offered on three-year debt issued by Galaxy Entertainment Group, a Hong Kong company with a lower credit rating than Evergrande that operates casinos in Macau. The difference shows that yields are artificially low in Hong Kong due to a lack of other investment options for anyone there holding yuan. Settling in dollars makes synthetic yuan bonds accessible to a wider pool of investors, who also demand higher returns for the risk they take investing in non-investment-grade securities.

The question is why the issuers like synthetics. The developers all need yuan to acquire land or invest in their projects in mainland China. The dim sum bond market offers the cheapest funding costs, and raises money directly in yuan, skipping the need to convert from dollars. Yet not one developer has offered a dim sum bond.

Much of the answer lies in the fact that China is in the midst of a tightening cycle. Property companies are particularly under the gun; authorities are loath to see them get access to cheap credit that allows them to buy land and push up home prices.

"If they raised money in CNH"—that's the industry term for yuan traded in Hong Kong, versus the CNY used in mainland China—"they'd need regulatory approval to bring that money in," says Herman van den Wall Bake, head of global risk syndicate, Asia, at Deutsche Bank. "If you apply to bring CNH in, you need to show the use and source of the proceeds, and it is understood that regulators don't want CNH to be used to fund land-bank acquisitions."

In other words, authorities in China don't want anyone using super-cheap loans in Hong Kong to buy up land in the mainland.

Oddly enough, there's no such taboo against raising dollars abroad through synthetic yuan bonds, and then wiring that money onshore. "It's quite ironic," says Ivan Chung, a senior analyst in corporate finance at Moody's Investors Service. "It's easier to wire U.S. dollars than renminbi" into China, where renminbi is the legal currency.

At the same time, issuers command lower coupons on synthetic yuan bonds than dollar bonds, pocketing the difference, though they forego any gains on renminbi appreciation.

Evergrande spokesman Jimmy Fong says his company, which has 112 property projects in 62 cities, chose to raise dollars rather than yuan because it already had approval from the Ministry of Commerce to bring dollars into China. "It wouldn't be incorrect that it's on the agenda for the government to cool down the property sector," he says, but he doesn't believe there's any specific regulation preventing property developers from remitting yuan from offshore into China.

Spokespeople for China's Ministry of Commerce and State Administration of Foreign Exchange didn't respond to requests for comment.

Mr. Fong also questions whether the dim sum market is deep enough to raise $1.4 billion, as Evergrande did with its synthetics. McDonald's Corp. got a lot of publicity for issuing dim sum bonds, but it raised only 200 million yuan, or about $30 million, he notes. If the company had tried to raise two billion yuan, could it have done it? "I'm not sure," he says.

For the last six or seven months, China's efforts to create an international market for its currency in Hong Kong has generated huge excitement, particularly in the banking industry. Yuan has accumulated in ever larger amounts in Hong Kong's banking system. Dim sum bonds have been a key part of the experiment.

The reality is that the most enthusiastic yuan borrowers in the market right now aren't borrowing in yuan, they are borrowing in old-fashioned dollars. The market for offshore yuan may seem pretty free in Hong Kong, but as long as China can decide who can take their yuan back onshore, and when, the market isn't really that free. Truly internationalizing China's currency could take more time than some people assume.