Yuan Next? Spotlight on New Carry Trade

RBC "Yuan Carry Trade More Flexible"
Citigroup, Goldman, Nomura Also Interested

The "yen carry trade," which involves borrowing yen at low interest rates to earn profits, caused market turmoil as a large-scale liquidation occurred earlier this month. Analysts suggest that the next wave of investment demand may shift toward the yuan.

According to Bloomberg on the 25th (local time), the Royal Bank of Canada (RBC) analyzed that the yuan carry trade will be more resilient as the People's Bank of China, the country's central bank, maintains a dovish (monetary easing) policy.

The carry trade involves borrowing money from low-interest-rate countries to invest in assets of high-interest-rate countries. Over the past three years, Japan maintained negative interest rates, leading to a surge in yen carry trades where funds were raised in low-interest yen to invest in emerging market currencies such as the Mexican peso and U.S. tech stocks. However, amid growing expectations of a rate cut by the U.S. Federal Reserve (Fed), the Bank of Japan (BOJ) raised rates on the 31st of last month. The yen's value surged sharply from around 161 yen (approximately 1,482 won) per dollar to the 141 yen level within a month, leading to massive liquidation of investments.

Market forecasts suggest that investors will turn their attention to the yuan instead of the recently strong yen. Alvin T. Tan, head of Asia currency strategy at RBC, stated, "Allowing a currency to strengthen while the central bank attempts policy easing is contradictory," adding, "As the Chinese economy faces difficulties, the People's Bank of China is expected to further ease policies over the coming months and is actually signaling this."

According to Bloomberg data, the carry trade borrowing yuan to invest in eight emerging market currencies yielded a 0.5% return this quarter. In contrast, similar yen carry trade products plummeted about 7%.

The principles of the yuan carry trade and yen carry trade are the same. Although the yuan has recently appreciated, Bloomberg highlighted the practical differences between the yen and yuan. The yuan is subject to restrictions on foreign currency inflows and outflows imposed by authorities to control the economy, resulting in relatively limited trading volume and liquidity, and lower convertibility. This automatically limits the scale of yuan carry trades compared to yen carry trades.

Furthermore, while yen carry trades are broadly invested, most yuan carry trade investors are Chinese exporters and multinational corporations. According to Australian investment bank Macquarie, Chinese exporters and multinational companies have accumulated over $500 billion (approximately 660.65 trillion won) in dollar assets since 2022.

Research reports by strategists including Dirk Willer of Citigroup indicate that Citigroup recently recommended investors bet on the Mexican peso and Brazilian real with yuan and yen in the options market. Goldman Sachs and Nomura Holdings also advised selling yuan against a trade-weighted basket of other currencies due to China's challenging macroeconomic conditions and a weakening U.S. dollar.

This content was produced with the assistance of AI translation services.