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Foreign Investors Boost Demand for China’s Bank Debt, Supporting Yuan Stability

by Team Lumida
March 13, 2025
in Macro
Reading Time: 4 mins read
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China’s Central Bank Embraces Hedge Fund Tactics to Tame $4 Trillion Bond Market

"China's flag" by futureatlas.com is licensed under CC BY 2.0

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Key Takeaways:

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  • Rising yields on China’s short-term bank debt, such as negotiable certificates of deposit (NCDs), are attracting foreign investors.
  • The yield on one-year AAA-rated NCDs has climbed to 2.03%, the highest since June, making them more appealing than U.S. bills of the same tenor.
  • Increased foreign inflows into NCDs may indirectly help Chinese banks defend the yuan by facilitating USD-to-CNY funding swaps.
  • The People’s Bank of China (PBOC) is using tighter liquidity measures to support the yuan, driving up NCD yields further.

What Happened?

China’s bond market selloff has created opportunities for foreign investors to purchase yuan-denominated short-term bank debt, such as negotiable certificates of deposit (NCDs), which now offer higher yields. The yield on one-year AAA-rated NCDs rose to 2.03% this week, the highest level since June. This has attracted global investors, who are swapping dollars for these higher-yielding instruments. As a result, foreign holdings of Chinese NCDs reached 1.07 trillion yuan ($148 billion) at the end of January, the highest since September. The increased demand has also pushed up the one-year FX swap rate to its highest level since October.


Why It Matters?

The surge in foreign investment in Chinese NCDs could play a critical role in stabilizing the yuan amid escalating trade tensions between the U.S. and China. By increasing foreign-exchange hedging demand, these inflows indirectly support the People’s Bank of China’s efforts to curb yuan volatility. Additionally, the higher yields on NCDs reflect the PBOC’s strategy of tightening liquidity to reduce yuan supply and bolster the currency. For investors, this trend highlights the growing appeal of Chinese debt instruments as a diversification opportunity, particularly in a volatile global market.


What’s Next?

Investors should monitor the PBOC’s liquidity policies and their impact on NCD yields, as well as the broader implications for yuan stability. Rising foreign inflows into Chinese debt could further strengthen the yuan’s position, especially if trade tensions escalate. Additionally, the premium between FX-hedged NCDs and U.S. bills may continue to attract global investors, potentially amplifying the role of foreign capital in China’s financial markets. The evolving dynamics of U.S.-China trade relations and their impact on market sentiment will also remain key factors to watch.

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Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018