Chinese Government Bonds Gain Appeal as U.S. and Japanese Debt Falters, Emerging as ‘Alternative Safe Haven’ on Stronger Yuan

China accelerates diversification of foreign reserve assets by increasing gold reserves and reducing U.S. Treasury holdings
Expectations of greater exchange-rate defense capacity restore confidence in yuan-denominated assets
Growing demand for Chinese government bonds reinforces their status as an alternative safe-haven asset

As government bonds in the United States, Europe and Japan reel from Iran War-driven inflation and mounting fiscal burdens, Chinese government bonds have emerged as an alternative safe-haven asset. With the property downturn and weak credit demand channeling liquidity from China’s financial sector into the sovereign bond market, prices have remained resilient despite increased issuance. Yuan appreciation and the People’s Bank of China’s accommodative stance have also attracted foreign capital, while China’s expanding gold reserves have reinforced confidence in the currency’s value and the country’s capacity to withstand external shocks. As confidence in advanced-economy sovereign debt wanes, investors are increasingly adding Chinese government bonds to their portfolios as an alternative safe-haven asset.

Chinese Government Bonds Sidestep War Shock

According to Reuters on the 9th local time, the standing of Chinese government bonds in global fixed-income markets has recently begun to shift. This reassessment gathered momentum after the Iran War erupted in late February. From the outset of the conflict, sovereign bond markets in the United States and Europe priced in renewed inflation stemming from surging energy costs and the possibility of further policy-rate increases, while China’s bond market remained comparatively stable. Between late February and early April, the yield on China’s 10-year government bond edged down to 1.81%, whereas the U.S. 10-year yield rose by 0.38 percentage points and the UK 10-year gilt yield jumped by 0.7 percentage points. China had already been contending with subdued consumption and a depressed housing market before the war, keeping inflationary pressure low, while its coal- and renewable-heavy power grid and purchases of Russian energy partially absorbed the oil-price shock. Expectations that the People’s Bank of China would maintain its accommodative stance even as Western central banks moved closer to tightening also supported Chinese government bond prices.

Actual capital flows substantiated this change in perception. According to the Institute of International Finance (IIF), China’s bond market attracted $2.5 billion in foreign capital in March, while the Iran War was under way, whereas emerging-market bond markets excluding China recorded outflows of $16.7 billion. Within China, the property downturn and weak corporate borrowing demand also steered idle domestic liquidity into the government bond market. As the People’s Bank of China continued supplying liquidity, the overnight repurchase agreement rate fell to its lowest level in two and a half years, while daily trading volume surged to a record $1.27 trillion in April. The vast savings held by Chinese financial institutions and households, whose overseas investment options remain restricted, circulated within the government bond market and effectively created a buffer against the global bond sell-off.

Foreign Inflows Accelerate as Yuan-Adjusted Returns Improve

Yuan appreciation has further enhanced the investment appeal of Chinese government bonds. The onshore yuan strengthened to $0.1489 on the 3rd, its highest level since February 2023, and has gained more than 4% against the dollar this year. As stronger yuan-adjusted returns offset low nominal yields, foreign investors have gradually expanded their exposure. In particular, combined issuance of dim sum and panda bonds has reached $148.9 billion this year, already surpassing last year’s full-year record. Chinese authorities have also introduced five-year Chinese government bond futures in Hong Kong and expanded the derivatives infrastructure for managing interest-rate risk, strengthening the ecosystem for yuan-denominated bonds. These measures have widened the channels through which yuan accumulated through trade settlements can flow back into government bonds and the broader fixed-income market.

This trend has gained further momentum as volatility in U.S. and Japanese government bonds has increased. As of the 10th, China’s 10-year government bond yield stood at 1.68%, a record 3.17 percentage points below the U.S. 10-year yield. U.S. Treasuries offer higher interest rates, but widening fiscal deficits and inflation concerns have intensified downward pressure on prices, while Japanese government bonds have faced continued selling amid the government’s mounting interest burden and the prospect of further rate increases by the Bank of Japan (BOJ). Chinese government bonds, by contrast, have offered both price stability and potential foreign-exchange gains, supported by the People’s Bank of China’s accommodative policy stance and the stronger yuan. At the end of July, foreign institutions held $477.8 billion in bonds traded in China’s interbank market, of which government bonds accounted for $300.7 billion, or 62.9%.

Table 1. Reallocation of China’s Gold and Foreign Exchange Reserves

China’s Gold Reserves Reach 76.73 Million Ounces, Strengthening Yuan Defenses

China’s steady expansion of gold’s share in its foreign exchange reserves is also reinforcing confidence in yuan-denominated assets. According to Reuters, the People’s Bank of China held 76.73 million ounces of gold at the end of last month, an increase of 650,000 ounces from the previous month. Gold purchases continued for a 22nd consecutive month, with the monthly increase reaching its highest level since October 2023. The central bank accelerated its buying even as international gold prices surged 9.7% in August. The move underscores a policy commitment to continuously expand non-dollar reserve assets irrespective of price fluctuations.

China’s expansion of its gold reserves dovetails with its efforts to rebalance foreign exchange reserves heavily concentrated in U.S. Treasuries and the dollar. China’s holdings of U.S. Treasuries fell by $25.9 billion in June to $633.4 billion, their lowest level in 18 years. By contrast, the country’s total foreign exchange reserves increased by $19.5 billion from the previous month to $3.4383 trillion at the end of August, while the assessed value of its gold reserves rose to $350.08 billion. China has thereby established a buffer through which gold can absorb part of the decline in reserve-asset values should the dollar and U.S. Treasury prices fall in tandem. Expectations that the People’s Bank of China can defend the yuan against external shocks have strengthened accordingly.

A New Catalyst for Yuan Internationalization

Analysts broadly agree that China retains considerable capacity to purchase more gold. At the end of last year, gold accounted for 8.8% of China’s foreign exchange reserves, roughly one-third of the 27% average among central banks worldwide. Given that China manages the world’s largest stockpile of foreign exchange reserves, it has correspondingly ample scope to increase gold’s share of its asset allocation. With concerns persisting over the widening U.S. fiscal deficit and dollar depreciation, the incentive to rebalance reserves away from U.S. Treasuries and toward gold has also intensified. This explains expectations that the People’s Bank of China will not readily retreat from its purchasing campaign even as international gold prices hover at record highs.

Expanding gold reserves also supports China’s drive to internationalize the yuan. As the People’s Bank of China enlarges its gold holdings, it gains greater capacity to limit losses in its foreign exchange reserves even if the dollar and U.S. Treasury prices decline simultaneously. This strengthens Chinese financial authorities’ ability to defend the exchange rate and mitigates concerns that the yuan could experience abrupt volatility. Companies and financial institutions that acquire yuan through trade with China also have a stronger incentive to retain and invest those holdings in Chinese government bonds rather than convert them into dollars when the exchange rate remains stable. Diversifying foreign exchange reserves through gold accumulation consequently bolsters demand for yuan holdings and supports the flow of offshore yuan back into China’s bond market.

China’s Stranded Liquidity Converges on Government Bond Market

Within China, the combination of the property downturn, stock-market volatility and weak corporate credit demand has driven funds held by banks, insurers and other financial institutions into government bonds. As the People’s Bank of China maintained its accommodative monetary policy, short-term funding costs also remained low. With the overnight repo rate falling to around 1.2% in April, 10-year government bond futures rose for eight consecutive trading sessions. Financial institutions continued purchasing government bonds as they sought stable investment outlets for funds obtained at low cost. As the banking sector’s asset-allocation focus shifted from private-sector credit toward sovereign debt, China’s bond market acquired sufficient absorption capacity to sustain prices despite large-scale supply.

The persistence of price strength despite substantial government bond issuance is equally noteworthy. Under the $193.5 billion ultra-long special government bond issuance plan announced in March, the Chinese government intended to supply $17.7 billion in 20- and 30-year bonds to the market. Although increased issuance ordinarily depresses government bond prices and pushes yields higher, China’s 30-year government bond yield fell by approximately 0.13 percentage points over the month to around 2.22%. Abundant domestic liquidity rapidly absorbed the newly issued securities, offsetting the upward pressure on yields generated by the increase in supply.

By contrast, government bonds in the United States, Europe and Japan have lost credibility as safe-haven assets as they simultaneously price in inflation and fiscal burdens following the Iran War. The International Monetary Fund (IMF) assessed that the traditional safe-haven premium attached to U.S. Treasuries is disappearing amid a surge in supply, while expanding defense expenditure and fragile public finances have driven long-term yields higher in Europe. In Japan, government bond volatility has increased since the Bank of Japan embarked on its rate-increase cycle, eroding perceptions of the asset class as a store of value during crises. Against this backdrop, Chinese government bonds—with their deep domestic buyer base, ample scope for monetary easing and support from a stronger yuan—have emerged as an alternative destination for foreign capital. As both domestic Chinese liquidity and global diversification demand flow into the market, Chinese government bonds are likely to maintain their relative strength for as long as instability persists across advanced-economy sovereign bond markets.