The Chinese yuan is emerging as a favored currency to fund carry trades as a surging yen erodes returns on traditional bets, strategists say. Bank of Japan interest rate-hike signals have driven up the yen's value, diminishing its appeal for such trades. Analysts at Citigroup Inc., Malayan Banking Bhd., Societe Generale SA, and BBVA SA are now pointing to the yuan as a strong contender to fund carry trades. The shift reflects growing investor demand for cheaper funding currencies amid changing monetary policy dynamics in Asia.

The yuan's growing role in carry trades marks a notable pivot in global currency markets. Historically, the yen dominated these strategies due to Japan's prolonged low-interest-rate environment. However, recent policy shifts by the Bank of Japan have altered the calculus for investors seeking to borrow cheaply and invest in higher-yielding assets.

Strategists across multiple global banks have identified the yuan as a viable alternative, signaling broader confidence in China's currency markets. The development could increase yuan-denominated transactions and deepen its integration into international finance.

Investors are watching closely as the carry trade landscape evolves. The yuan's stability and China's monetary policy stance will be key factors determining its sustained appeal as a funding currency.