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In this study, the Chinese yam peel polysaccharide (CYPP) was obtained under the extraction conditions optimized by the Response Surface Methodology (RSM). Further biological properties of CYPP‐1 purified from CYPP were also determined. The results indicated that the optimum extraction conditions were an extraction temperature of 90.5°C, a liquid–solid ratio of 28.0 ml/g, and an extraction time of 2.94 h, along with a yield of 8.81 ± 1.48%. CYPP‐1 was identified as a kind of heteropolysaccharide mostly composed of glucose and galactose (59.4:1.0). The molecular weights were two main parts of 50.5 kDa (54.77%) and 4.4 kDa (21.02%), and the triple‐helix conformation was not formed in CYPP‐1. Besides, CYPP‐1 showed good biological properties including in vitro antioxidant activity and immunomodulatory function on RAW264.7 cells, as well as favorable hypoglycemic effect. Overall, the high‐value utilization of CYPP‐1 reveals a broad application prospect in the industrial production of functional foods and pharmaceuticals. Practical applications: Yam peel, which is discarded in large quantities during postharvest processing, results in the production of tremendous by‐products and is a great waste of resources. In this study, the yield of water‐soluble polysaccharide from yam peel reached 8.81 ± 1.48%. Besides, the purified CYPP‐1 exhibited excellent antioxidant activity, favorable immunomodulatory function, and hypoglycemic effect. The high productivity and bioactive effects are both great merits for Chinese yam peel polysaccharide as a promising candidate for foods and medicines industrial production. [ABSTRACT FROM AUTHOR]