Foreigners Boost China Bond Holdings by Most in Two Years

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  • Increase comes amid efforts to boost access to local markets
  • More inflows seen as investors start trading, StanChart says

Overseas investors increased their holdings of Chinese onshore bonds by the most in more than two years in June after regulators eased restrictions on foreigners accessing the interbank market.

The amount of debt held by overseas entities rose 47.7 billion yuan ($7.2 billion) to 764 billion yuan, latest available data from the People’s Bank of China show. That’s the biggest monthly increase since February 2014, according to Bloomberg calculations based on official figures.

The rising interest comes amid a widening yield advantage, and efforts to boost foreign participation and understanding of central bank policy. The authorities have since February allowed all types of medium- to long-term investors to access the interbank bond market, and said that approved fund managers under the Qualified Foreign Institutional Investors program no longer have to apply for quotas to invest onshore. The U.K.’s vote to leave the European Union has also spurred a global rush for haven assets.

“Global investors are keen to look for higher-yielding assets, and yuan bonds are good candidates,” said Becky Liu, Hong Kong-based senior rates strategist at Standard Chartered Plc. “This, along with a more transparent currency market and weak domestic fundamentals, are boosting demand for onshore debt. As private-sector foreign investors have yet to set up everything to start trading, it’s likely to see more inflows in coming months.”

Demand for safety has been buttressed by an economy projected to expand at the slowest pace in 26 years, and by a currency set to weaken for the third year in a row. The yield premium on China’s 10-year debt over U.S. Treasuries rose to 148 basis points on July 5, the most since April 2015, before narrowing to 130 basis points, data compiled by Bloomberg show.

Foreign investors’ holdings of Chinese debt have climbed for four consecutive months, after falling 87.9 billion yuan in the first two months of this year, according to the PBOC data released late Friday. A separate set of figures released by the China Central Depository & Clearing Co. show global funds boosted their holdings of government bonds for eight months in a row.

PBOC Deputy Governor Pan Gongsheng said in June that the nation will push for the inclusion of domestic notes in global bond indexes such as those compiled by Citigroup, JPMorgan Chase & Co. and Barclays Plc. The comments came before the yuan officially joins the International Monetary Fund’s reserve basket in October.

The yield on government notes due May 2026 rose one basis point to 2.79 percent on Monday, National Interbank Funding Center prices show.

The PBOC drained a net 43 billion yuan via Medium-term Lending Facility in July, according to Bloomberg calculations based on the central bank data. That was the biggest withdrawal under the loan program since July 2015.