In the first week of the conflict, the renminbi (CNY) was the best-performing currency, with volatility kept under control. Analysis focused on whether it was acting as a secondary safe haven after the US dollar, supported by stronger energy resilience than savings-heavy Asia-Pacific peers.
Flow data showed CNY buying matched large outflows from Chinese Government Bonds (CGBs). For most of the year, CNY and CGB holdings moved in opposite directions, with CNY purchases linked to the unwinding of CGB positions amid worries that higher inflation could reduce real rates.
Shift In Flow Dynamics
Toward month-end, demand for CGBs picked up again, while CNY flows moved back to net selling, consistent with increased hedging. Early Q2 data then showed both CNY and CGBs being net bought at the same time.
This pattern suggests rising outright CNY exposure, even with low relative yields and continued People’s Bank of China resistance to real effective exchange rate (REER) appreciation. An alternative reading is that reflation in China is beginning for the first time since the post-pandemic reopening, and that expectations for front-end yields may be incorrect, alongside an easing-leaning Federal Reserve even before the ceasefire was announced.
Looking back at the conflict in early 2025, we saw the CNY act as a safe haven, but this was initially tied to investors selling Chinese government bonds (CGBs). That inverse relationship, where money moved out of bonds and into the currency, was a consistent theme for much of last year. However, a significant shift began around the second quarter of 2025, when we started observing simultaneous net buying of both CNY and CGBs.
This trend of dual inflows appears to be continuing into 2026, suggesting investors are now seeking outright exposure to Chinese assets. Recent data confirms this, with foreign holdings of CGBs showing a net inflow of over ¥80 billion in March 2026, marking the fourth straight month of gains. This indicates a growing confidence that is not just about parking cash in the currency, but investing in the country’s debt market with less currency hedging.
Implications For Traders
For derivative traders, this persistent demand and the People’s Bank of China’s preference for stability mean that currency volatility is likely to remain low. Implied volatility on one-month USD/CNY options has recently fallen near multi-year lows, making strategies that profit from low volatility, such as selling strangles, more attractive. The expectation is for controlled, gradual movements rather than sharp breaks.
The potential for genuine reflation in China, a possibility we first noted in 2025, is now supported by a stable 5.1% GDP growth figure for the first quarter of 2026. This economic stability, coupled with a Federal Reserve that has already enacted several rate cuts and is now signaling a pause, alters the risk-reward for holding Chinese assets. The interest rate differential between the U.S. and China is no longer widening, providing fundamental support for the yuan.
Therefore, traders should consider that the old playbook of hedging all CGB exposure may be less effective now. The simultaneous buying of the currency and bonds suggests that outright long CNY positions or options strategies that benefit from a stable-to-stronger yuan are becoming more viable. This reflects a structural change in how global markets view Chinese assets, treating them less as a tactical trade and more as a core holding.
