However, the crisis also revealed an important new development: China’s currency (the renminbi or yuan) and Chinese government bonds increasingly exhibit characteristics traditionally associated with safe-haven investments – often outperforming peers when geopolitical risks escalated and weakened when tensions eased.

The clearest evidence comes from China’s bond market. While inflation concerns and expectations of tighter monetary policy caused many global bond markets to sell off, Chinese government bonds rallied. In the first three months of the conflict, yields on 10-year Chinese government bonds fell while equivalent US Treasury yields rose sharply. At the same time, demand for Chinese government debt remained resilient despite changing funding conditions.

Currency markets told a similar story. The offshore yuan became one of the strongest-performing emerging market currencies following the outbreak of the conflict. Notably, this appreciation occurred despite several conventional economic indicators that would normally have implied a weaker currency. The yuan’s behaviour appeared increasingly driven by safe-haven demand rather than by interest-rate differentials or other traditional foreign-exchange drivers.  

Closed capital account limits reserve currency appeal but boosts safe haven value

1. China continues to benefit from low inflation. Stable prices help preserve the real value of domestic assets and are a common feature of established safe-haven economies. In fact, weak domestic demand and excess industrial capacity have pushed China close to deflation in recent years, enhancing the real purchasing power of its currency.
2. China’s export profile is evolving rapidly. Traditional safe-haven economies such as Germany, Switzerland and Japan are known for exporting high-value goods and services rather than competing primarily on low costs. China increasingly fits this model. Higher value exports take away the risk that China could devalue its currency to gain a competitive advantage. 
3. China possesses many of the macroeconomic characteristics associated with safe-haven countries. It runs a large current account surplus and maintains one of the world’s largest net external asset positions, making it a significant global creditor. These attributes provide a degree of financial resilience and reinforce confidence during periods of international stress.

Even as the share of global reserves held in US dollars has declined modestly, the yuan has not been a major beneficiary. Instead, reserve diversification has largely favoured the euro and a broader range of alternative currencies.

Why? A key obstacle is China’s relatively closed capital account. Reserve currencies must offer investors large volumes of safe, liquid and freely tradable assets. While China’s capital controls help insulate domestic markets from global volatility – enhancing their safe-haven qualities – they simultaneously restrict the yuan’s international adoption.

A growing proportion of China’s imports and exports are now denominated in yuan, reflecting increased acceptance among trading partners. However, international reserve managers have not significantly increased their holdings of yuan assets.

This suggests that confidence in China’s economic fundamentals alone is insufficient. Global investors and central banks also require deeper, more liquid and more accessible financial markets before the yuan can challenge established reserve currencies.  

China’s emergence as a safe-haven destination is not just a temporary market phenomenon. It’s part of a long-term economic transformation, and something that will help in China’s reserve currency ambitions. However, to be a reserve asset, investors need access to it – in large, convertible and safe assets. Until this happens, yuan reserve status remains far afield.