China wants you to buy ‘quasi-safe’ yuan bonds as it aims to ‘unleash growth momentum’ in economy

To encourage capital inflows, China’s foreign-exchange regulator seeks to reassure investors who have been waiting to see how economic policy will unfold
‘Policy optimisations’ and ‘pro-growth tools’ seen helping coordinate pandemic controls with economic development

China's economic recovery

Frank Tangin Beijing

Published: 9:00pm, 22 Nov, 2022

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China’s foreign-exchange regulator is trumpeting the attractiveness of yuan-denominated assets – as well as the country’s economic prospects – in the latest bid to encourage capital inflows and ease overseas concerns.

The comments come as foreign investors have been trying to get a read on the policy direction of Beijing’s new economic line-up following last month’s 20th party congress. A strong US dollar, China’s restrictive zero-Covid strategy and a property-sector downturn have left the market wondering if the economic headwinds in China will intensify.

“The hedging role of yuan-denominated assets has become more obvious,” Pan Gongsheng, deputy governor of the People’s Bank of China, and also director of the State Administration of Foreign Exchange (SAFE), said on Monday at the annual Financial Street Forum in Beijing.

The influential three-day gathering is considered a bellwether of financial reform and opening up in China.

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“Compared with the price fall of sovereign bonds of major economies so far this year, yuan bonds were one of a few maintaining stable prices,” Pan said. “They are quasi-safe assets.”

China has been increasingly courting the inflows of long-term institutional investors. But its foreign-exchange market and yuan exchange rate have come under huge pressure this year, with large amounts of capital flowing out of domestic financial markets since February, in anticipation of the US Federal Reserve aggressively raising interest rates this year.

Pan said the US dollar may fluctuate at high levels given still-elevated inflation in the United States, but he said that the strong cycle could be approaching its end, depicting a contrasting scene in which advanced countries face the growing risk of an economic recession while China’s recovery momentum and long-term fundamentals remain strong.

“The recent policy optimisations can better coordinate pandemic controls with economic development. This, together with many pro-growth tools announced earlier, will further unleash growth momentum,” he vowed.

China’s central bank has already eased the financing rules for private property developers and plans a 200-billion-yuan (US$28 billion) relending quota to ensure the delivery of homes to homebuyers.

Meanwhile, more foreign investors are turning optimistic on China investments.

Tobias Pross, head of Allianz Global Investors, said investors should cultivate a new mindset towards China and be less inclined to label it risky terrain.

“China is an economic powerhouse in the world, undoubtedly with potential,” he told the Post.

Kinger Lau, Goldman Sachs’ chief China equity strategist, said a week ago that China’s full reopening could result in a 20 per cent rise in Chinese stocks, potentially adding US$2.6 trillion to the equity market.

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The US-based Institute of International Finance estimated that outflows from Chinese equities reached US$7.6 billion in October, while a further US$1.2 billion left bond markets.

Inflows grew after the conclusion of the 20th party congress, which addressed political uncertainties and refined some policies negatively affecting economic growth.

A net purchase of 17.9 billion yuan was registered via the mainland-Hong Kong stock connect in the last month, with a total of 47 billion yuan in the past six months, according to data from East Money Information, a Chinese financial and stock information website provider.

SAFE deputy director Lu Lei, speaking in a different session at the Beijing-based forum, said the regulator – which oversees the country’s US$3.05 trillion worth of foreign-exchange reserves – has been closely monitoring changes in the investment preferences and strategies of global institutional investors.

“Some have mentioned investment opportunities in China, saying its growing economic strength will help reshape the global consumer market,” Lu said, citing communications with big international players such as BlackRock, Goldman Sachs and JP Morgan.