In Shanghai and Singapore, foreign investors are swiftly entering the Chinese interbank debt market as domestic yields increase. They aim to benefit from favorable currency conversion rates and the market's low correlation with global trends.

Particularly, U.S. dollar investors are purchasing negotiable certificates of deposit (NCDs), short-term debt instruments issued between banks, as the hedged return surpasses that on U.S. Treasuries.

It is noteworthy that foreign investors had not been growing their holdings of Chinese government bonds since September 2024 due to a weakening yuan and less attractive carry trade conditions. However, they have been increasing NCD holdings since December, indicating a slight shift in capital flow towards China amid simmering Sino-U.S. trade tensions.

As of the end of February, foreign investors held a record high of 1.14 trillion yuan worth of NCDs, marking the third consecutive month of buying. One-year NCD yields have risen by approximately 40 basis points this year to about 2%, while 10-year sovereign yields increased by 20 basis points to 1.89%.

Moreover, dollar investors can earn 2.8% by converting their cash into yuan, resulting in NCD investments yielding 4.8% compared to around 4% on one-year Treasuries.

According to Cary Yeung, head of greater China debt at Pictet Asset Management, global investors are drawn to assets that are less correlated, attracting capital to China due to its distinct price action from the rest of the world. Wei Li, head of China multi-asset investments at BNP Paribas, highlighted that rising domestic yields, a favorable hedging environment, and the possibility of U.S. interest rate cuts make Chinese bonds appealing to investors.

(1 USD = 7.2378 CNY)