Foreign investors’ sales of Chinese yuan-denominated bonds picked up again in September, official data showed, reflecting continued pessimism over China’s economic outlook and the prospects for its currency.
International investors’ total holdings of Chinese government bonds and other yuan-denominated debt in mainland China dropped to 3.4 trillion yuan, the equivalent of $470bn, in September. That was the lowest level since December 2020, according to data released 28 October by the China Central Depository & Clearing Company and the Shanghai Clearing House.
Last month’s pullback was led by foreign institutions’ cutting of positions in Chinese sovereign debt, which saw a net outflow of $5bn. Policy bank bonds, which are securities issued by large state-owned lenders, experienced $2.9bn in net outflows.
In September, the Chinese yuan weakened past the widely watched level of 7 per dollar for the first time in more than two years and has continued to depreciate against the greenback through October. The yuan has fallen more than 12% against the dollar this year in China’s tightly controlled onshore market as well as the more freely traded offshore market — where it recently hit a record low of more than 7.32 per dollar — diminishing the international appeal of assets denominated in the Chinese currency.
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A massive rally in the US dollar was the main reason for the move, but China’s sputtering economy has also contributed to the yuan’s decline. Rising US interest rates and the dollar’s relative strength have prompted global investors to pull money from emerging-markets assets and purchase more US bonds that offer higher returns.
Chinese government bonds for years yielded significantly more than their US counterparts, but that relation flipped in April. The 10-year Treasury note on 28 October yielded around 4%, versus the 10-year Chinese government bond’s 2.7%.
“Coupled with the depreciation pressure of yuan, the total return of Chinese government bonds is not attractive at this juncture, in our view,” said Andy Suen, head of Asia ex-Japan credit research at PineBridge Investments.
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The latest data on foreign ownership of Chinese bonds was released a couple of weeks later than usual, with no explanation given for the delay.
Earlier this month, China also delayed its release of official third-quarter GDP data, which showed that its economy grew 3.9% in the three months to 30 September from the same period a year ago. That put overall growth for the first nine months of 2022 at 3%.
Many economists expect China to miss its official full-year GDP growth target of 5.5% as the country struggles with sporadic Covid-19 lockdowns, a deep housing market downturn and weak consumer spending.
The bond selldown in September marked the eighth consecutive month of net outflows that started in February, the month that Russia invaded Ukraine. Since then, foreign investors have cut their holdings of Chinese bonds by the equivalent of $92bn.
The pace of overall selling had eased in July and August, months that saw small net inflows into Chinese government bonds. September’s overall net outflows were nearly twice the total for August.
“A lot of people who were going to sell have already sold,” said Riad Chowdhury, head of Asia-Pacific at MarketAxess, referring to yuan-denominated bonds.
Active investors, as opposed to central banks and institutions that passively track bond indexes, have been the main sellers, based on trading activity reflected in the Bond Connect channel that links markets in Hong Kong and the mainland, Chowdhury added.
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This article was published by Dow Jones Newswires, a fellow Dow Jones Group title
Graduating from Aarhus University with a degree in communication and media studies, Kristina has been an avid writer and follower of the finacial news and cybercrymes space since 2011. A well-traveled journalist within the industry, Aubrey has written for many well-known outlets, and can often be found poring over white papers when she isn’t writing for Financial Magazine