Foreign investors lured to high-yielding Chinese bank debt

Investors have found a safer haven in unstable markets: Chinese interbank debt instruments. Foreign investors have begun to take advantage of favorable currency conversion rates and the refuge offered by the market’s low correlation with the rest of the world.

Led by US  dollar investors, they are buying a lot of negotiable certificates of deposit (NCDs). NCDs are short-term debt instruments issued between banks to meet their funding needs. The guaranteed return on these is higher than the return on US Treasuries. 

Cary Yeung, head of greater China debt at Pictet Asset Management, said, “Global investors are trying to seek something that is very decorrelated… The price action is completely different to the rest of the world. That mindset attracts some of the flow back to China.”

This is bad news for the US, as China’s economy is thriving more. However, the US economy has become more unstable under Trump’s policies. China has rather obtained a strength no investor saw coming: Its weak currency.

The country has managed to make Chinese goods less expensive and more appealing compared to goods from other countries. While this is happening, the US is trying to reduce its dependence on China through tariffs. 

So far, it has not worked as expected, but Trump and his administration say it will yield fruits in the near future.

The trade war between China and the US favors China

After buying Chinese government bonds all year, foreign buyers haven’t added to their holdings since September 2024. Why? The yuan has been weakening, and the carry trade has become less appealing.

But since December, they have bought more NCDs, which shows a small change in the flow of capital into China and gives the yuan a safety net as the trade war between China and the US heats up.

At the end of February, foreign investors owned 1.14 trillion yuan ($157.51 billion) worth of NCDs. This was the most ever recorded and the third month in a row that investors bought.

One-year NCD yields have gone up about 40 basis points (bps) this year to about 2%. Ten-year government yields have gone up 20 bps to 1.89%. In addition, dollar buyers also make 2.8% when they exchange their cash for yuan. This means that NCD investments earn 4.8%, while one-year Treasuries only earn about 4%. 

The Chinese stocks remain steady

An index of Chinese stocks listed in Hong Kong mostly kept its gain and finished the day up 0.6%. The top-tier mainland CSI 300 Index ended the day 0.2% lower than it started before the conference. 

On Friday, both gauges went up more than 2% because investors thought the government would support them even more.

At the meeting, an official said that China’s central bank is considering new structural monetary policy tools to help key areas of consumption obtain more low-cost money. Li Chunlin, deputy chief of the National Development and Reform Commission, said that consumer demand and trust are still low.

According to Shen Meng, a director at the Beijing-based investment bank Chanson & Co., officials are talking about spending more but not enough about how to raise incomes. This could make steps meant to increase consumption less effective.

Another bunch of economic data that came out didn’t get much attention from investors, even though it showed some signs of hope. Retail sales and manufacturing output both went up more than economists thought they would.

However, this year, Chinese stocks have done better than those in other countries. In fact, In 2025, the MSCI China Index has gone up about 20%, while the S&P 500 Index has gone down about 4%. One reason for this is a rise in technology stocks that the DeepSeek AI model caused.

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