Global funds reduced holdings of Chinese public debt for the first time in two years in March, as their yield premium to Treasuries narrowed and authorities announced plans for more debt sales .
Foreign investors held 2.04 trillion yuan ($ 312 billion) of Chinese government bonds at the end of last month, according to data from ChinaBond. This is 16.5 billion yuan less than the record amount held in February, according to Bloomberg calculations. The last time foreign institutions reduced their holdings was in February 2019.
As Chinese bonds have become a safe haven during this year’s global debt rout, soaring Treasury yields to levels last seen in January 2020 have dampened their appeal. Entries may also slow down after FTSE Russell saidthe inclusion of the national debt in its global index last month will take three years, instead of the 12 months initially envisaged, after investor feedback.
“While rising Treasury yields still 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 indicates that in the future, foreign interests in CGBs and Chinese bonds in general are 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. year.”
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Global funds have piled up in Chinese sovereign debt for 24 consecutive months, doubling their holdings during that time as the government eased ownership restrictions and the securities were included in global indexes. A lack of correlation with foreign bonds also attracted investors, helpingthey gained 1% in the first quarter, the only one to do so among the 20 largest markets in the world.
The yield premium of China’s 10-year benchmark bonds to Treasuries narrowed by around 1 percentage point to around 154 basis points, after a record high in November. This advantage is expected to erode further, with some on Wall Street predicting US yields to climb to 2%.
To top it off, the slower-than-expected inclusion in the FTSE Russell Global Government Bond Index comes just as China’s entries in other major benchmarks are more or less complete. Global funds hold around 11% of the Chinese sovereign bond market.
“We are on a hiatus between the inclusion of bond indices by Bloomberg-Barclays and JPMorgan, which is completed, and by WGBI, which will not begin until October,” said Kowalczyk of Credit Agricole. “This means downside risks to Chinese bond inflows and upside risks to their returns this year.”
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The reduction in foreign interests also came after Chinaannounced a higher-than-expected quota for sales of local government debt, with some analysts saying this will put pressure on the market as a whole. While sovereign bonds are more popular with foreign investors, Chinese commercial banks are the main buyers of local debt.
theChinaBond’s data covers the majority of the interbank market, where most government and police banknotes are traded. Other figures will likely be released by the Shanghai clearinghouse in a few days and will cover some credit obligations in the interbank and forex markets.
“Offshore investors may temporarily adjust their holdings of Chinese government bonds, but they won’t stop buying,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. in Shanghai. “Index flows will restart with the inclusion of the FTSE from October, while a large trade surplus will continue to support the renminbi and offset the strength of the dollar.”
– With the help of Livia Yap, Wenjin Lv and Jing Zhao
(Updates with quotes from analysts in the fourth and final paragraphs)