The yuan is poised to overtake the yen as the top carry trade currency after the Bank of Japan signaled a potential interest rate hike.

Strategists point out that the yuan is becoming a new alternative to the yen in carry trades, with strategies using the yuan yielding a 1.5% return over 3 months, compared to a 1% loss using the yen.

On September 9, 2026, at 7:51 AM, Bloomberg News reported that the Chinese yuan is gaining increasing attention as a currency for use in carry trades, replacing the yen, following the appreciation of the Japanese yen which forced investors to look for alternatives. Strategists from several major financial institutions believe that the yuan's low borrowing costs and stability are making it more attractive.

Historically, the Japanese yen has been one of the main currencies used in carry trades, where investors borrow money in a lower-interest currency and invest it in assets or currencies that offer higher returns to profit from the interest rate differential.

However, signals from the Bank of Japan (BOJ) indicating a potential interest rate hike have pushed the yen stronger and reduced its attractiveness as a source of financing.

Strategists from Citigroup, Maybank, Societe Generale, and BBVA have begun to suggest that the yuan could become a major competitor to the yen in the carry trade market.

Fiona Lim, senior strategist at Maybank, said that relatively low interest rates, coupled with the stability of the yuan, could increase its attractiveness as a currency for fundraising in carry trade, especially as China's interest rates remain relatively stable amidst rising global bond yields.

Low and stable financing costs are a key factor for Carry Trade, as investors seek to borrow in lower-cost currencies before investing in higher-yielding assets.

While many central banks around the world face pressure to raise interest rates, China continues to have low borrowing costs, making it easier for investors to access cheaper funding.

Meanwhile, the yuan has also maintained relatively low volatility, supported by the Chinese economy's ability to cope with higher oil prices and the People's Bank of China's (PBOC) currency management.

This stability helps reduce the risk that Carry Trade investors will face from exchange rate volatility, a problem that has affected the yen in the past.

The yen reversed its weakening trend from August to appreciating by about 4% since the beginning of September, while the offshore yuan remained virtually unchanged.

Data compiled by Bloomberg indicates that a strategy of borrowing yuan offshore and investing it in a basket of eight emerging market currencies yielded approximately 1.5% returns over the past three months. In contrast, the same strategy using the yen as a source of funding lost approximately 1%.

The basket of emerging market currencies includes the Brazilian real, Mexican peso, Indian rupee, Indonesian rupiah, South African rand, Turkish lira, Hungarian forint, and Polish zloty.

Citigroup strategists noted in a report in early September that the high returns from carry trades relative to offshore yuan volatility made the yuan more attractive as a currency for fundraising.

Citigroup believes that the increase in volatility-adjusted carry trade returns could make the yuan a more popular currency for carry trade globally.

The yuan previously played a significant role in carry trade. In 2567, investors created short positions in the yuan to invest in the dollar and other higher-yielding emerging market currencies, benefiting from both the yuan's depreciation and high US interest rates.

However, the appreciation of the yuan driven by strong Chinese exports has diminished returns from carry trade and led investors to reduce their use of this strategy since last year.

The potential of the yuan as a carry trade currency is currently regaining attention, following soaring yields on US, Japanese, and UK government bonds, which have widened the spread between the yuan and China's interest rates.

This situation is further highlighted as the PBOC continues to pursue a moderately accommodative monetary policy, contrary to interest rate pressures in many countries.

Kyong Sung, a strategist at Societe Generale, stated that the current balance between the potential for yuan appreciation and the returns from carry trade is neutral. However, a wider interest rate spread would likely make carry trade strategies more profitable in the future.

Furthermore, the daily reference rate set by the PBOC in the past, which allows the domestic yuan to fluctuate within a range of plus or minus 2%, signals that the People's Bank of China does not want to see the yuan appreciate significantly from its current level.

However, while the PBOC supports the use of the yuan in international borrowing through bonds, loans, and trade finance, the Chinese central bank is unlikely to encourage carry trade speculation, especially if it leads to excessive one-way currency betting.

Although the yuan has become more attractive, the scale of carry trades using the yuan as a source of funding is still more limited than with the yen, because Chinese currencies are not yet fully exchangeable.

Darius Kowalczyk, head of Asia asset strategy at BBVA, also warned that liquidity in the long-term Chinese loan market remains relatively low, making it unlikely that the yuan will be able to completely replace the yen in carry trades.

However, he believes that the BOJ's interest rate hikes will be a major driving force for the expansion of carry trade using the yuan.

Kowalczyk stated that investors should watch for the possibility that the offshore yuan could replace the yen as the main Asian currency used to finance carry trade.

If the BOJ raises interest rates in September, the cost of borrowing yen will rise to near the cost of the yuan. And if the BOJ raises rates again after that, the cost of borrowing the yuan offshore could be lower than the yen for the first time, potentially becoming a key turning point for Asia's carry trade markets.

Reference: bloomberg.com

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