Foreign investors increased their China onshore bond holdings in December
FOREIGN holdings in China’s onshore yuan bonds increased for a fourth month in December 2023 as the narrowing yield gap between China and the US encouraged some foreign investors to add positions for short-term opportunities.
Foreign institutions held 3.67 trillion yuan (S$686.4 billion) in bonds traded on China’s interbank market as of the end of 2023, the Shanghai office of the People’s Bank of China (PBOC) said on Monday (Jan 15), up from 3.49 trillion yuan a month earlier.
Smaller yield spreads with the US may encourage some foreign investors to start to rebuild exposure to China bonds, HSBC analysts said in a note.
However, analysts at HSBC think these inflows are hedged against currency moves given current low hedging costs, so it will be unlikely to provide significant support for the yuan.
“We still don’t see that trigger for the real money investor community, the big asset managers to actually come relocate at large scale to China, because as much as the Fed is cutting rates, we are also expecting China to be cutting rates,” Pin Ru Tan, head of Asia-Pacific rates strategy at HSBC, said in a media briefing on Monday.
The yield gap between 10-year US treasuries and China government bonds continued narrowing in December, by 38 basis points (bps). But the current yield gap still remains wide at around 142 bps.
December’s bond inflows of roughly US$25 billion came after foreign investors bought US$35 billion worth of China’s onshore bonds in November, the largest monthly inflow since January 2021.
Foreign investors bought 280 billion yuan worth of China’s onshore bonds for the past year, according to Reuters’ calculations based on data from the PBOC.
Although market participants expect monetary policy for 2024 to remain accommodative, China’s central bank surprised some market participants by not cutting rates on medium-term policy loans on Monday. REUTERS
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