China’s ongoing bond selloff is creating attractive opportunities for foreign investors, with increased demand for yuan-denominated short-term bank debt. This trend, fueled by rising yields on Chinese negotiable certificates of deposit (NCDs), could also offer unintended support to Beijing’s efforts to stabilize its currency.
The yield on one-year AAA-rated NCDs, a form of short-term debt issued by Chinese banks, surged to 2.03% this week, marking the highest level since June. This increase is drawing the attention of global investors, traders say. Furthermore, the premium between FX-hedged one-year NCDs and their U.S. counterparts has reached its highest point this year, a sign that these Chinese debt instruments are becoming increasingly attractive.
The influx of foreign capital could provide the People’s Bank of China (PBOC) with an added tool to mitigate volatility in the yuan, which has been under pressure amid escalating trade tensions between the U.S. and China. Foreign investors held 1.07 trillion yuan ($148 billion) in Chinese NCDs by the end of January, the highest total since September.
This surge in global demand for NCDs has driven up foreign-exchange hedging activity in the onshore market, pushing the one-year swap rate to its highest point since October. Analysts suggest that these inflows could play a role in facilitating China’s efforts to stabilize the yuan. While it may not directly defend the yuan, the flows could help Chinese banks swap USD funding to stabilize the yuan’s spot rate if needed.
Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp, noted that with NCD rates hovering around 2%, foreign investors may find the market appealing enough to re-enter with smaller positions, particularly as implied yuan rates remain stable.
The rise in NCD yields since January can be attributed to the PBOC’s strategic efforts to reduce yuan supply and stabilize the currency by curbing liquidity offerings. An increased supply of NCDs has also contributed to the higher yields, further reinforcing their appeal to foreign investors.
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