Market stability faces new threats as fears mount over a possible unraveling of the Chinese yuan carry trade.
Global markets, recovering from Monday’s sharp selloff, are now shifting their focus to the Chinese yuan amid warnings from analysts about potential turbulence. The massive market drop earlier in the week, the worst since Black Monday 1987 for the Nikkei, was driven by the unwinding of yen carry trades following Japan’s interest rate hike. Experts now caution that the yuan might be the next currency to experience a similar unwinding.
The carry trade strategy, which leverages Japan’s ultra-low interest rates to fund investments in higher-yielding assets, was disrupted by the Bank of Japan’s recent rate increase. This forced investors to liquidate positions, triggering a global market rout. With China maintaining a low interest rate environment to stimulate its economy, concerns are growing that the yuan carry trade could unravel, especially as Chinese exporters hold significant dollar reserves that might soon be converted.
Despite these worries, some analysts believe the impact of a yuan carry trade unwind may not be as severe as the yen’s. Vishnu Varathan from Mizuho Bank argued that the yuan’s weaker position stems from China’s structural economic challenges and geopolitical risks rather than purely monetary factors. Unlike the yen, the yuan is less liquid globally, and China’s economic transition and trade tensions further complicate its outlook.
Goldman Sachs and JPMorgan analysts echoed these sentiments, noting that weak Chinese economic fundamentals and ongoing monetary policy easing by the People’s Bank of China are likely to keep the yuan under pressure. They warned that the real risk lies in the yuan’s depreciation, which could incite broader market volatility, rather than a surge in its value.
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