Industry Odisha Bureau, Sep 10: Japan’s rising rates and China’s falling yields have created a record yield gap. Investors are eyeing the yuan as cheap funding, though risks remain.
Japan’s yen ruled global funding markets for three decades. Traders borrowed cheap yen and invested it abroad. That world is shifting.
The Bank of Japan’s policy rate stands at 1%. Markets expect another rise, to 1.25%, at its September 17-18 meeting. Japan’s 10-year bond yield sits near a three-decade high.
Record Yield Gap
China’s 10-year bond yielded 1.68% on Thursday. The US 10-year Treasury yielded 4.85%. The gap, 3.17 percentage points, is the widest on record. China’s yields overtook America’s yields in 2022. Falling Chinese yields reflect weak borrowing demand and mild inflation. Consumer prices rose just 0.8% in August.
How the Yuan Carry Trade Works
A trader could borrow yuan near 1.7%. They could convert it into dollars. They could buy Treasuries yielding 4.85%. That leaves a rough three-point spread before costs. But the loan must be repaid in yuan. A stronger yuan can erase that gain entirely. Japan’s own carry trade unwound violently in 2024. The Bank of Japan raised rates in July that year. Tokyo’s stock market then fell about 12% in a single day, its worst since 1987.
Panda and Dim Sum Bonds
Foreign borrowers are tapping yuan markets directly. Panda bonds are sold inside mainland China. Kazakhstan raised 3.4 billion yuan in May. Pakistan followed with 1.75 billion yuan, a South Asian first. UBS sold its first panda bond in August, at 1.78%. Dim sum bonds, sold offshore, are also growing. Portugal became the first Eurozone government to issue one, in April. Combined panda and dim sum issuance has topped 1 trillion yuan this year. That is roughly $150 billion, a record pace. Strategists at Citigroup and other banks see the yuan as an emerging funding-currency candidate.
Why the Yuan Isn’t the Yen Yet
Beijing may welcome this borrowing. China ran a $735 billion current-account surplus last year. Foreign yuan borrowing gives Beijing a visible, supervised outflow channel. It also creates yuan-selling pressure, easing appreciation. China wants greater global use of the yuan too. Its 2026-2030 plan makes this a strategic priority. Yuan settlement in trade reached 34.5% last year, up sharply from 2017. Yet its financial role lags badly. Yuan payments through SWIFT were just 2.75% in May. Central banks hold under 2% of reserves in yuan.
The Bottom Line
Capital controls remain the biggest obstacle. The yuan is not freely convertible like the yen. Hedging currency risk, as Portugal found, cuts into savings. Cheap funding alone cannot build a global currency’s role. That needs stability, convertibility and lasting investor trust. The yuan is gaining ground, not yet the yen’s successor.
