The yuan’s path to becoming a global funding currency depends more on the nation’s supply-chain dominance rather than low borrowing costs, according to a top Chinese economist.

“Growth in yuan financing demand cannot simply be equated with yen-style carry trades,” Miao Yanliang, chief economist at China International Capital Corp., said in a written interview, referring to a strategy where traders borrow currencies with lower interest rates to buy higher-yielding assets.

“The yuan’s greater potential lies in relying on China’s strong real economy and its position in global supply chains to form a sustainable international investment and financing cycle,” he said.

Comments from Miao, who previously worked at the International Monetary Fund and China’s State Administration of Foreign Exchange, come as borrowing costs hovering near record lows prompt investors to look to the yuan as an alternative to the yen for funding carry trades. That appetite for low-cost funding has spurred a record rush of foreign borrowers tapping China’s onshore market via panda bonds, alongside all-time high debt sales in offshore yuan, known as dim sum bonds.

Miao cautioned that borrowing driven purely by yield differentials is inherently fragile. “Low interest rates can attract financing demand, but low rates alone cannot ensure that demand is sustainable,” he said.

Rather than relying on speculative arbitrage, the yuan’s appeal as a financing currency is anchored by the world’s largest manufacturing base, which accounts for about 30% of global output, Miao said. He pointed to Chinese companies expanding abroad and foreign partners buying Chinese equipment as drivers of genuine demand to borrow and settle in yuan.

Miao also urged China to increase the yuan’s exchange-rate flexibility as a priority for advancing the currency’s global reach.

“A key approach would be to allow the yuan to exhibit greater independence from the dollar in its exchange-rate movements, so that trade partners will have stronger reasons to choose the yuan for invoicing, settlement or even as a reference for setting their own exchange rate,” Miao said.

The onshore yuan has gained 4.8% against the dollar in 2026, defying a nearly 2% rise in the Bloomberg Dollar Spot Index to show independent strength from the US currency. Yet under Beijing’s managed float regime, price swings remain tightly constrained. In a sign of constrained flexibility, one-month yuan volatility is the second lowest among 25 major currencies tracked by Bloomberg, trailing only the pegged Hong Kong dollar.

Greater flexibility allows the currency to absorb shocks and regulate cross-border capital flows naturally, according to Miao. He cautioned that when the exchange rate is kept too rigid, efforts by authorities to defend onshore stability during negative shocks may end up raising offshore interest rates, undermining overseas adoption of the yuan.

That push for flexibility comes at what Miao sees as a prime moment for reform. “Our research shows that, when the dollar is weak and exchange rate imbalance pressures are limited, it would be a favorable window for incremental steps to increase exchange-rate flexibility,” Miao said.

More broadly, Miao called for promoting direct trading of the yuan against a wider range of currencies, particularly across Asia. Beyond offering a cross-border payment channel, higher transaction volumes in direct currency pairs are essential to lower conversion costs, he added.

“China is at the center of Southeast Asian supply chains and has extensive intermediate-goods trade, production specialization, and investment links with neighboring countries, providing a solid trade foundation for regional yuan use,” he said.