Money out of thin air: what is promising and dangerous about yuan curry-trading

Ultra-high interest rates in the Russian economy have led to a certain freezing of the domestic market. Many investors, primarily private investors, have become uninterested in investing in anything other than bank deposits. However, this has also created opportunities, for example, in the form of curry trading. In our case, we are talking about borrowing significant sums in yuan and investing them in reliable ruble assets. One can do nothing and not risk one's own money, just get income due to arbitrage (interest difference). How widespread such practice is, what it gives and how it can be dangerous both for individual investors and for the Russian financial market as a whole - in Izvestia's article.

From yen to yuan

Carry trade as a phenomenon emerged in the late 1990s. At that time, the Bank of Japan kept ultra-low rates to fight deflationary processes in the economy. In the US, on the contrary, Fed rates were at high levels amid rapid growth. Investors quickly realized that it was possible to make money on it. A market emerged with the volume of transactions worth trillions of dollars annually. After a break due to the 2008 crisis, the practice was revived in the 2010s. Carry trades are also the norm now, given the five percentage point difference in prime rates between Japan and the US.

In Russia, the situation has been favorable for this in the last couple of years. China has been teetering on the brink of deflation for quite some time. Rates are at a relatively low level. The base rate is at 3.1%, while bank rates are only slightly higher. For comparison: in Russia, the key rate has reached 21% and has been at this level for several months. The yuan deficit that emerged last year has been successfully overcome. It became possible to take out loans in Chinese currency and invest them in reliable Russian instruments with minimal risk. For example, federal loan bonds or debt securities of corporations with high ratings.

Of course, there are risks of ruble devaluation, but the difference in interest rates is now so great that even they are more than covered. In essence, we are talking about making money literally out of thin air.

How can the situation affect the market? According to Hovhannes Hovhannisyan, the director of the analytical department of Digital Broker, at the moment it is a very limited volume of trade, even insignificant.

- RUSFAR rates are repo rates, if you have yuan bonds, you can give them to repo for one day or a week and get yuan at approximately the RUSFAR rate. If you then sell those RMBs, get rubles and repurchase them at ruble money market rates, you can make money. But first you must have yuan bonds, and there are not so many of them on the market," the speaker commented.

According to Hovhannisyan, the following is what is meant by curry trades in our case.

- Most likely, low yuan rates mean that there are a lot of players on the market, most likely exporters, who have a lot of yuan, and they are ready to sell or lend it: for example, to deposit it in the bank or to lend it on the money market. But banks do not want to pay good interest on these yuan because they cannot deposit yuan at an adequate interest rate. Therefore, exporters have no choice but to convert yuan into rubles and place the resulting ruble liquidity in money market instruments," he said.

Not quite convertible

Now the rate on 10-year government bonds of China is 1.68% against 17% on similar Russian OFZ, cited the data of analyst "Finam" Alexander Potavin. According to him, the curry-trade works well as long as the rates on yuan or ruble do not change or as long as the exchange rate of national currencies: ruble or yuan remains stable.

However, as the RMB is not a fully convertible currency, this imposes certain restrictions on the operations of a curry trade, as it may be difficult to access the necessary volumes of liquidity. Rapid and significant changes in interest rates may also become one of the risks in this speculative scheme, the expert stated.

According to Dmitry Babin, stock market expert at BKS Investment World, given that the market value of a yuan loan is around zero and was recently even negative, while the yield on many ruble debt instruments exceeds 20%, there is a great temptation to borrow in yuan, sell them for rubles, which are then invested at a high interest rate.

- However, there are serious risks that during the period of holding such a position, the depreciation of the ruble-yuan exchange rate will exceed the yield. That is, in our hypothetical example, the yuan will grow by more than 20% against the ruble on a longer-term horizon. Moreover, as a result of such a movement, it will not even exceed the three-year maximum set in November slightly above 15 rubles. Therefore, such a scenario for the currency market is quite realistic," said Dmitry Babin.

Risks for the whole market

The expert added that such transactions can lead to negative consequences not only for investors, but also - if their number is large enough - for the entire financial market.

- As a result of the last wave of strengthening, the ruble has become unreasonably expensive, especially in terms of stability of the state budget and exporters' income. Consequently, under current conditions, such a curry trade is very risky. And its likely collapse (mass closing of these positions) will only strengthen the ruble depreciation, which will act as a trigger for the liquidation of such positions in the debt and currency markets," said Babin.

Alexander Potavin believes that another risk may be a change in the policy of the Chinese Central Bank:

- The People's Bank of China may artificially weaken or strengthen the position of the national currency if a change in the foreign economic situation (trade war with the US) requires it. And this may cause the risk of mass curtailment of such curry-trade transactions, which, in turn, may lead to increased volatility of currency rates and instability on stock exchanges.

He gave the following analogy: in the summer of 2024, the Japanese currency appreciated sharply against the dollar due to the closing of yen vs. dollar sale transactions when weak U.S. data came out, which significantly affected expectations for Fed Funds rates.

- Thus, the yuan-ruble carry trade may be attractive for investors looking for high yields, but it involves significant risks amid market volatility," Potavin stated.