BNY Strategist Geoff Yu reports that the Chinese yuan (CNY) initially acted as a secondary safe haven during a recent conflict, outperforming other currencies and exhibiting managed volatility. In the first week of the conflict, CNY was the best-performing currency, with its energy resilience surpassing savings-heavy APAC peers and volatility tightly controlled by authorities [1]. Flows during this period showed a consistent inverse relationship between CNY purchases and Chinese Government Bond (CGB) holdings, as investors unwound CGB positions likely due to concerns about higher inflation and declining real rates [1].
Toward the end of the month, interest in CGBs returned, and CNY flows shifted to net selling, suggesting increased hedging activity [1]. However, early Q2 data indicate a notable change: both CNY and CGBs are now being net bought, hinting at growing outright CNY exposure despite low relative yields and ongoing resistance from the People's Bank of China (PBoC) to real effective exchange rate (REER) appreciation [1]. This simultaneous buying could signal evolving market behavior, with CGBs being purchased at lower hedge ratios than before [1].
Yu also raises the possibility that, for the first time since China's post-pandemic reopening, genuine reflation may be occurring, and markets could be misjudging the outlook for front-end yields. Additionally, expectations of an easing-inclined Federal Reserve—even before a ceasefire was announced—may alter the risk-reward calculus for hedging Chinese assets compared to previous years [1].
CONCLUSION
Recent market flows suggest a shift toward simultaneous buying of CNY and Chinese Government Bonds, indicating increased confidence in Chinese assets and potential changes in hedging strategies. While concerns about inflation and yield outlook remain, the evolving safe-haven role of CNY and expectations of a dovish Fed are influencing investor behavior. The market appears to be reassessing the risk-reward dynamics for Chinese assets in light of these developments.