A stronger yuan helped overseas holders of China’s sovereign bonds to reap a profit in January even as yields rose, boosting the case for inflows to continue after global funds dumped the debt last year.
(Bloomberg) — A stronger yuan helped overseas holders of China’s sovereign bonds to reap a profit in January even as yields rose, boosting the case for inflows to continue after global funds dumped the debt last year.
The Bloomberg China Aggregate Treasury Index delivered a return of 2.86% in dollar terms last month, with the yuan’s rise spurring a 2.88% gain — the largest contribution since 2018. Yields on government debt due in a decade rose over six basis points in January, exceeding their increase in the whole of 2022.
The positive return augurs well for Chinese securities after overseas investors sold a record 616 billion yuan ($92 billion) of the notes in 2022 amid a widening yield gap with the US. The yuan has climbed about 3% since the start of the year as China’s economy reopened and the pace of US rate hikes slowed, with Wall Street Banks including Morgan Stanley predicting that more gains are in store.
“The scope of currency gain would be a positive for China bond return and thus could lead to more inflows,” said Albert Leung, an EM Asia local market strategist at Nomura International in Hong Kong. The firm expects the offshore yuan to rise to 6.5 per dollar by March from around 6.72 now.
There are already signs that global funds have started to return. Inflows into China stocks and bonds resumed in December and extended in the first half of January, a spokesperson at the State Administration of Foreign Exchange said last month.
Investors from 60 countries have bought a net 126.1 billion yuan of China bonds since December, state-run CCTV reported this week, citing officials at the China Foreign Exchange Trade System.
“We are quite positive in terms of bond inflows as passive inflows may rise in catchup and global funds’ China exposure could be still underweight,” said Tommy Xie, economist at Oversea-Chinese Banking Corp in Singapore. But, risks remain for the yuan given that US rates will continue to rise while China’s central bank has room to ease, he added.
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