Offshore investors boost holdings of Chinese bonds by US$5.9 billion in September, biggest gain in 12 months

Foreign demand for debt securities comes amid falling yuan and sell-off by domestic investors

PUBLISHED : Wednesday, 11 October, 2017, 12:46pm
UPDATED : Wednesday, 11 October, 2017, 2:15pm

Offshore institutions increased their holdings of Chinese bonds for a seventh consecutive month in September, indicating resilient overseas demand for the securities despite a weakening yuan.

Holdings of all forms of Chinese bonds held by offshore investors and cleared by China Central Depository and Clearing Co rose by 38.7 billion yuan (US$5.88 billion) in the month, to 896 billion yuan, according to calculations based on figures from the clearing house.

It was the largest increase in holdings by offshore investors since September 2016, and contrasted with a 1.7 trillion yuan decrease in overall Chinese bond holdings by all investors.

“Regulatory tightening forces domestic institutions to deleverage and stock up on cash. Currently, short-term rates are high, so repos are better investments than bonds,” said a Shanghai-based trader at an asset management company, explaining why domestic investors had unloaded bonds in September.

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Market observers have pointed to strong gains in the yuan, as well as high yields, to help explain offshore interest in Chinese bonds in recent months.

By early September, the yuan had gained 7.5 per cent against the US dollar year-to-date, but authorities allowed it to pull back a bit later in the month, possibly out of concerns that its rapid run-up could hurt exporters.

The rise in foreign holdings in September came despite the Chinese currency losing about 1 per cent of its value against the US dollar over the month, its weakest monthly performance in percentage terms since November 2016.

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However, the attraction of China’s bond market has increasingly outweighed “tactical” factors such as currency fluctuations, Frederic Neumann, co-head of Asian Economics Research at HSBC in Hong Kong, said.

“Partly ... because of low yields elsewhere in the world, Chinese yields look attractive. But also because China is too big to ignore as an asset market,” he said. “If you’re a big money manager, you need to take China’s bond market seriously.”

CCDC did not release a breakdown for September of foreign holdings by bond type, which it had done in previous months. Previous months’ figures showed foreign holdings concentrated in government and policy bank bonds.