Chinese bond market records fourth month of foreign capital outflows

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Foreign investors reduced their holdings of Chinese bonds by another $16 billion in May, a month in which the yuan hit a 20-month low as institutions continued to transfer money to other countries. other assets offering better returns.

May marked a fourth consecutive month of Chinese yuan-denominated bond outflows and brought the total drawdown since February to more than $60 billion.

The pullback is by far the biggest since the Chinese bond market was made more accessible to foreigners in mid-2017, with the launch of the Bond Connect trading link with Hong Kong. The move, coupled with the addition of Chinese debt to influential indexes, helped spur an increase in inbound buying.

Last month, international investors reduced their bond positions by a total of 109.4 billion yuan, or about $16.2 billion, a similar amount to April, according to data from two clearinghouses, the China Central Depository & Clearing Co. and the Shanghai Clearing House.

Foreign investors began to reduce their holdings of Chinese bonds in the same month as Russia invaded Ukraine, raising concerns about the geopolitical risks of investing in China. In April, yields on Chinese government bonds fell below yields on equivalent US Treasuries for the first time in more than a decade, removing a key attraction for foreign investors in Chinese debt.

Yields on Chinese government bonds have been restrained this year, while Treasury yields have soared, helped by rate hikes by the US Federal Reserve to combat persistently high inflation. On Wednesday, the 10-year Treasury bond yielded 3.385%, compared to 2.841% for the 10-year Chinese government bond, according to data from Tullett Prebon.

China’s prolonged Covid-19 lockdowns have also weighed heavily on growth in the world’s second-largest economy, making Chinese bonds less attractive to investors. Since mid-April, the yuan has weakened rapidly, and on May 12 it slipped to over 6.82 to the dollar, its lowest point since September 2020. It has since recovered to trade at 6.71 to the dollar.

Foreign positions in Chinese bonds totaled the equivalent of $542.8 billion at the end of May, their lowest level in a year, according to the CCDC.

Arthur Lau, head of fixed income for Asia ex-Japan at PineBridge Investments, said his firm has been underweight Chinese government debt and political bank bonds since the start of this year. “The trajectory of rates in China is a completely different story than in the United States,” he said, adding that he expects Treasury yields to rise further this year as the Fed rises. rates to fight inflation.

China’s macroeconomic environment, by contrast, “continues to be very weak and the slowdown is accelerating,” he said. While Beijing is expected to ease policy and increase government spending to halt the slowdown, Chinese bond yields are unlikely to move much, he predicted.

The yuan could also weaken, hurting returns for dollar-based investors such as PineBridge, he added. “We don’t think now is the right time to increase our positions in local government bonds due to the currency issues.”

The math is different for bond investors who focus on emerging markets in Asia, said Jason Pang, senior portfolio manager at JP Morgan Asset Management in Hong Kong. While a US dollar-based Chinese government bond index is down around 2.6% this year on a total return basis, it has outperformed China’s government bond indices. most other countries.

“As an Asian investor, you wouldn’t do better to be underweight China relative to the rest of the region,” Pang said, adding that his firm remains invested in Chinese government debt.

Foreign holdings are largely, but not entirely, made up of Chinese government bonds and bonds issued by large government-backed lenders, known as strategic banks.

May’s decline included a net reduction of 14 billion yuan in foreign holdings of onshore Chinese government bonds, according to figures released by the CCDC on Wednesday. International investors also sold 74.63 billion yuan net of notes issued by political banks.

The continued exit came despite recent efforts by Chinese regulators to boost foreign investor interest in the Chinese bond market. On May 27, the People’s Bank of China, the China Securities Regulatory Commission and the State Administration of Foreign Exchange issued a directive to further open the Chinese bond market to foreign investors.

They said that from June 30, foreign investors will be allowed to invest in the onshore bond markets in Shanghai and Shenzhen, as well as access the interbank debt market in which they already trade.

Write to Cao Li at [email protected] and Serena Ng at [email protected]

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