Foreign investors are increasingly turning their attention to China’s interbank debt market as yields begin to rise. This trend is fueled by attractive currency conversion rates and the relative stability of the Chinese market compared to global counterparts. Particularly, investors dealing in U.S. dollars are keenly acquiring negotiable certificates of deposit (NCDs), which are short-term debt instruments widely used among banks.

Surge in NCD Investments

The uptick in interest from foreign investors in China has been notable, especially in the realm of NCDs. As of the end of February, foreign holdings of these instruments reached an impressive 1.14 trillion yuan, equivalent to approximately $157.51 billion. This marks the highest level on record and signals the third month of consistent buying.

• Yield Growth: The yield on one-year NCDs has seen an increase of about 40 basis points this year, bringing it to around 2%.
• Sovereign Bond Yields: Similarly, the yield on 10-year government bonds has risen by 20 basis points to 1.89%.

Currency Advantages

For investors converting their dollars into yuan, the rewards are compelling. They can secure a 2.8% return through currency swaps, which boosts the overall yield on NCDs to an attractive 4.8%. In contrast, the yield on one-year U.S. Treasuries hovers around 4%, making Chinese investments particularly appealing.

Market Dynamics

Despite a general decrease in foreign investments in Chinese government bonds since September 2024, the renewed interest in NCDs indicates a shift in capital flows toward China. This development could offer crucial support to the yuan amidst ongoing tensions in the Sino-U.S. trade relationship.

Expert Insights

Cary Yeung, head of Greater China debt at Pictet Asset Management, notes that "investors are searching for options that are less correlated with other markets. The unique price dynamics in China are drawing attention back to the region." Wei Li, who leads China multi-asset investments at BNP Paribas, adds that the combination of rising local yields, favorable hedging conditions, and potential U.S. interest rate cuts makes Chinese bonds a more attractive option for investors.

In summary, the increasing demand for NCDs among foreign investors highlights a notable shift in the investment landscape of China, showcasing the country’s potential amid global uncertainties. For those eyeing alternative investment opportunities, the Chinese interbank debt market could be a promising avenue to explore.