The selloff in Chinese bonds by overseas investors eased last month as foreign demand for yuan debt stabilized amid concern over threats to the global banking system.
(Bloomberg) — The selloff in Chinese bonds by overseas investors eased last month as foreign demand for yuan debt stabilized amid concern over threats to the global banking system.
Total foreign ownership of domestic debt in the nation’s interbank market climbed by 3.5 billion yuan ($507 million) to 3.2 trillion in March, according to Bloomberg calculations based on official exchange data. They had cut holdings in all but one of the previous 13 months.
While global funds offloaded a net 27.8 billion yuan of China’s sovereign debt in March, they bought a net 42 billion yuan of negotiate certificates of deposit — fixed deposit receipts issued by banks that are negotiable in the secondary market — the most since January 2021. Their holdings of policy bank bonds were little changed.
The marginal increase of foreign holdings of China bonds reflects the better outlook for the yuan and Chinese economy, as well as the general stability of China’s financial system, said Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong. The split between government bonds and NCDs suggests global investors were reluctant to hold duration risk as China’s economy improves, she said.
“We think outflows will subside further in the second quarter and possibly return to inflows by year end” as the US-China yield differential stabilizes, Liu said.
The uptick in foreign holdings adds to evidence that China’s banking system had avoided any contagion from the global banking turmoil that saw the collapse of Silicon Valley Bank and Credit Suisse Group AG. Demand for the nation’s debt has yet to recover as yields remain well below those on US Treasuries, but there were positive signs such as the inflows into NCDs.
Still Susceptible
The relatively small overall inflow seen in March isn’t totally reassuring as its sustainability will be challenged by China’s still unattractive yields levels, according to Societe Generale SA.
“Inflows into China NCDs will be susceptible to external volatility, and once other global bond market stabilizes, foreign flows to NCDs may be at risk of being not fully rolled over,” said Kiyong Seong, lead Asia macro strategist at Societe Generale in Hong Kong.
Global investors held 2.13 trillion yuan of Chinese government bonds at the end of March, accounting for 8.4% of the total outstanding debt, the lowest proportion in two years, Bloomberg calculations show. Foreign ownership in the interbank bond market was 2.5% at the end of March, according to PBOC data.
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