China debt: global funds end two-year buying spree of Chinese government debt, cutting holdings by US$2.5 billion
- Foreign investors held 2.04 trillion yuan (US$312 billion) of Chinese government bonds at the end of March, data from ChinaBond showed, 16.5 billion yuan (US$2.5 billion) down from February
- Chinese bonds have emerged as a haven during the global debt rout this year, but overseas institutions have now cut their holdings for the first time since February 2019
Global funds trimmed holdings of China’s government debt for the first time in two years in March, as their yield premium over US Treasuries narrowed and authorities announced plans for more debt sales.
That is 16.5 billion yuan (US$2.5 billion) lower than the record amount held in February, according to calculations by Bloomberg. The last time overseas institutions cut holdings was February 2019.
While Chinese bonds have emerged as a haven during the global debt rout this year, the surge in US Treasury yields to levels last seen in January 2020 have dimmed their appeal.
The data indicate that going forward, foreign interest in [Chinese government bonds] and Chinese bonds in general is likely to be more limited as long as Treasury yields are high or rising, which will be the case for the rest of the year
Inflows may also slow after FTSE Russell said last month an inclusion of the nation’s debt into its global index will take three years, instead of the 12 months initially envisioned, after feedback from investors.
“While rising Treasury yields always pose a risk of capital outflow from emerging markets, net selling is very rare,” said Dariusz Kowalczyk, chief China economist at Credit Agricole CIB in Hong Kong. “The data indicate that going forward, foreign interest in [Chinese government bonds] and Chinese bonds in general is likely to be more limited as long as Treasury yields are high or rising, which will be the case for the rest of the year.”