Foreigners resume offloading Chinese bonds as yield differentials widen

FOREIGN investors resumed reducing their holdings of China’s onshore yuan bonds in April, after marginally increasing them the previous month, official data showed on Monday (May 15), as widening yield differentials between the world’s two largest economies discouraged inflows.

Foreign holdings of yuan-denominated bonds traded on China’s interbank market stood at 3.17 trillion yuan (S$609.9 billion) at the end of last month, down from 3.21 trillion yuan at end-March, the central bank’s Shanghai head office said.

In March, overseas institutional investors bought a net 10 billion yuan worth of yuan bonds.

The resumption of bond selling came as domestic investors’ hopes grew that Beijing may roll out fresh monetary stimulus, including interest rate cuts, to aid economic recovery. And the Federal Reserve signalled a potential pause in its tightening cycle.

“With the Fed showing little appetite for cutting policy rates this year, lowering policy rates in China might widen interest rates differentials with the US, spurring RMB depreciation and capital flight,” said Ting Lu, chief China economist at Nomura.

Ten-year US Treasury yields were traded 67 basis points higher than their Chinese counterparts at the end of last month.

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“Outflows from Chinese government bonds are expected to persist as yield differentials are still in negative territory and US-China tensions could weigh on foreign interest,” strategists at DBS said in a note. REUTERS