Foreigners Cut Chinese Bond Holdings First Time Since 2015

  • Ownership of sovereign debt drops in January amid market slide
  • Yuan depreciation pressures negative for inflows: SocGen

Why Money Keeps Flowing Out of China

Foreign investors are losing their passion for Chinese government debt as prices slide.

Overseas funds sold a net 1.9 billion yuan ($277 million) of the nation’s sovereign bonds in January, the first reduction since October 2015, according to China Central Depository & Clearing Co. data released over the weekend. That’s after global institutions bought 175.2 billion yuan of the debt last year.

Surging interbank borrowing costs sparked a selloff in the nation’s bond market toward the end of last year, ending a record bull run that had been in place since the beginning of 2014. Quickening inflation and expectations for a weaker yuan is also reducing the allure of Chinese debt to foreign investors.

“The overall environment is not supportive of bonds,” said Frances Cheung, Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. “The currency depreciation presents a double whammy to yuan bonds.”

The benchmark 10-year sovereign bond yield rose 34 basis points in January, the most since 2010. The yield rose eight basis points on Monday to 3.49 percent, the highest since 2015. The People’s Bank of China raised the cost of medium-term loans and open-market operation rates this year as policy makers seek to curb leverage in the financial system, rein in inflation and support the exchange rate.

Producer prices accelerated to the fastest pace in five years in December, while the median estimate in a Bloomberg survey is for the offshore yuan to weaken more than 5 percent this year, after the currency slumped almost 6 percent in 2016.

Higher offshore yuan borrowing costs contributed to the drop in holdings because some institutions fund their onshore bond positions overseas, according to David Qu, markets economist at Australia & New Zealand Banking Group Ltd. in Shanghai.

Foreign funds piled into the nation’s bonds last year after the PBOC opened the interbank debt market to all types of overseas investors.

— With assistance by Molly Wei, and Helen Sun

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