Chinese government bonds are likely to attract stronger fund inflows as the central bank pushes interest rates lower just as policymakers in the US and elsewhere prepare to dial back their monetary stimulus, investment bankers said. The People’s Bank of China this week trimmed its key lending rate for the second time in a month as the economy lost momentum in the final quarter of 2021, fanning a rally in sovereign debt and stocks at home. That move has entrenched expectations for more easing, while the Federal Reserve signalled an opposite tightening path. Lured by a yield advantage over US Treasuries and German Bund, global funds soaked up 513.7 billion yuan (US$81 billion) of yuan-denominated government bonds last year through November, according to data compiled by Bloomberg and China Central Depositary & Clearing. That trend has added to their still-tiny 2.8 per cent or US$386 billion ownership in the world’s second-largest debt market. “We see a rising probability of lower rates this year” given recent official statements signalling such intent, said Freddy Wong, head of Asia-Pacific fixed income in Hong Kong at Invesco, which manages US$1.5 trillion of assets. “As such, we continue to like onshore bonds.” Chinese government bonds have returned 3 per cent in the past six months, while US Treasuries lost 3.2 per cent as policy expectations diverged, according to ICE BofA Indexes. Euro-area government bonds fell 2.8 per cent. Ten-year Treasury yields rose to as high as 1.9 per cent this month, a level not seen since December 2019, according to Bloomberg data, after minutes from a previous meeting suggested the Federal Reserve is plotting a faster than expected withdrawal of stimulus, with three rate increases in 2022. Chinese government bonds yielded 2.73 per cent recently. “Compared with overseas bonds, which not only have relatively lower [yields] but also face the risk of falling prices driven by rising interest rates, the returns of Chinese government bonds will remain attractive,” said Zhang Xing, Hong Kong head of fixed income, investment banking department, at China International Capital Corp. China’s central bank lowered the rate on medium-term lending facilities and the seven-day reverse repo by 10 basis points on Monday. This was followed by cuts on Thursday in one- and five-year loan prime rates, the benchmarks for corporate borrowing and mortgage loans in China. “Foreign investors will continue to allocate capital into Chinese government bonds,” said George Sun, head of global markets for Greater China at BNP Paribas. “They not only offer higher [relative] yields. They are also uncorrelated with yields in other developed markets.” A weaker yuan could temper appetite for Chinese bonds, as Societe Generale forecast the local currency to depreciate in 2022 to 6.5 per dollar. It strengthened 2.8 per cent in 2021 to a three-year high of 6.3492. However, investors are also getting better real yields in yuan-denominated sovereign bonds. US inflation surged at the fastest annual pace in nearly four decades in December, increasing 7 per cent from a year ago. China’s consumer prices rose by 1.5 per cent last month from a year ago. The inclusion of Chinese government bonds in the FTSE World Government Bond Index last October is another plus factor. The move could induce US$140 billion to US$150 billion of inflows from index-tracking funds over three years, HSBC estimated. “We believe that the index inclusion , and diversification benefit should continue to attract foreign inflows into the China onshore rates bond market,” Invesco’s Wong said.