Foreign investors raise China bond holdings despite low yields

FOREIGN investors in February raised their holdings of China’s onshore yuan bonds for the sixth straight month, as investors continued to favour currency hedged returns despite the declining bond yields.

Foreign institutions held 3.95 trillion yuan (S$751 billion) in bonds traded on China’s interbank market as of the end of February, the central bank’s Shanghai head office said, up from 3.87 trillion yuan a month earlier.

China’s long-dated government bonds have been on a wild ride this year, with the 30-year treasury yield dropping as much as 46 basis points since the start of the year.

The popularity of long-dated bonds shows how desperate mainland investors are for safe assets to park their cash as confidence in the economy and stock market plummets.

But foreign investors are buying Chinese bonds for a different reason. Market participants said a lot of recent bond inflows are currency hedged using FX swaps, making the total return more attractive than just holding US treasuries.

The yield differential between the US and China’s 10-year treasuries widened to 193 basis points in late February, the widest since Nov 2023.

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China’s central bank left a key policy rate unchanged as expected on Friday when rolling over maturing medium-term loans, with uncertainties around the timing of rate cuts by the Federal Reserve limiting Beijing’s room to manoeuvre on monetary policy.

What could help China draw more inflows is the country’s promotion of over-the-counter (OTC) trades for its US$22 trillion bond market.

China will expand its inter-bank bond market to domestic and global retail investors via OTC trades from May 1, as part of its efforts to convert residents’ savings into investments. Institutions have so far been the major participants of China’s bond market. REUTERS