Foreign Buying of Chinese Government Bonds Stalls
By Frances Yoon
A huge run-up in foreign holdings of Chinese government bonds
has stalled, with international investors hitting pause on their
purchases as China's interest-rate advantage over the U.S. has
International ownership of Chinese government debt declined
slightly in March to the equivalent of $313 billion, according to
the China Central Depository & Clearing Co. Holdings fell about
1% to 2.04 trillion yuan, from 2.06 trillion yuan a month
That was the first drop in foreign investors' positions since
February 2019. It came in a month when the yuan weakened more than
1% against the dollar, after strengthening more than 9% from June
Meanwhile, prices for U.S. Treasury notes and other global
government debt have been falling, pushing yields higher. That has
shrunk the extra yield that China's sovereign debt offers over
This spread has narrowed to about 1.6 percentage points, after
topping 2.2 percentage points throughout the second half of last
year, data from FactSet and brokerage Tullett Prebon shows.
Jason Pang, a Hong Kong-based portfolio manager at J.P. Morgan
Asset Management, said he had recently taken some profits on
Chinese government bonds, or CGBs, and redeployed funds into
local-currency government bonds in Southeast Asian countries such
as Malaysia and Indonesia.
"We now expect a rotation out of CGBs into other assets to
capture more value," said Mr. Pang. Still, he added that Chinese
bonds had been more stable than bonds elsewhere so far this year,
offering investors shelter from market volatility as prices fell
and yields rose in other markets.
The dollar is likely to keep strengthening in the coming months,
and U.S. Treasury yields are likely to rise further, with benchmark
10-year yields hitting 2% by mid-2021, said Aidan Yao, senior
emerging Asia economist at AXA Investment Managers. As of Monday,
the yield on the 10-year Treasury note was slightly less than
Mr. Yao said that meant China could see reduced inflows, or even
further mild outflows, of foreign money from its sovereign-bond
market in the near future. He said discussions with clients such as
global pension funds and insurers suggested many investors were
still learning about China's onshore bond market, and said hedging
was an issue.
Longer term, however, Mr. Yao expects global fund managers to
increase their holdings, since they are very underweight compared
with bond indexes they track, such as the Bloomberg Barclays Global
Aggregate Index and benchmarks calculated by JPMorgan Chase &
A third index provider, FTSE Russell, said recently it plans to
add China to its World Government Bond Index over three years, a
longer time frame than many investors and analysts expected. FTSE
Russell is a unit of London Stock Exchange Group PLC.
Mr. Yao said further inflows into Chinese sovereign debt could
reach $160 billion over the next three years. Similarly, Mr. Pang
at J.P. Morgan Asset Management said he expects foreign holdings
could total 15% of the Chinese government-bond market within three
to five years. The current figure is about 10%.
So far, overseas investors have largely stuck to buying debt
issued by China's central government and by a handful of
state-owned lending institutions known as policy banks. They have
been slower to buy yuan-denominated corporate debt.
In total, their holdings of all sorts of onshore debt totaled
3.56 trillion yuan at end-March, the equivalent of $546 billion,
according to figures compiled by Bond Connect Co.
Write to Frances Yoon at firstname.lastname@example.org
(END) Dow Jones Newswires
April 19, 2021 05:44 ET (09:44 GMT)
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