Foreign investors are flocking to Chinese interbank debt instruments amidst rising mainland yields, capitalizing on advantageous currency conversion rates and the market's low correlation with global counterparts.
Particularly, U.S. dollar investors are rapidly acquiring negotiable certificates of deposit (NCDs) as their hedged returns surpass those of U.S. Treasuries.
Although foreign investors had not upped their stakes in Chinese government bonds since September 2024 due to the yuan depreciation and decreased attractiveness of the carry trade, their holdings of NCDs have been on the rise since December. This shift indicates a slight change in capital inflows into China, shielding the yuan amid ongoing Sino-U.S. trade tensions.
At the end of February, foreign investors held a record-high 1.14 trillion yuan ($157.51 billion) worth of NCDs, marking the third consecutive month of acquisitions.
The yield on one-year NCDs has surged by around 40 basis points (bps) this year to approximately 2%, while 10-year sovereign yields have climbed by 20 bps to 1.89%.
Moreover, through currency swaps, dollar investors are earning 2.8% when converting their funds into yuan, resulting in NCD investments yielding 4.8% compared to around 4% on one-year Treasuries.
Cary Yeung, head of greater China debt at Pictet Asset Management, noted, "Global investors are seeking assets that are decorrelated... The market dynamics in China differ significantly from elsewhere, attracting investment back to the country."
Wei Li, head of China multi-asset investments at BNP Paribas, pointed out that the combination of rising local yields, a favorable hedging environment, and potential U.S. interest rate cuts makes Chinese bonds an appealing option for investors.