Investors buy China bonds despite odds

Move shows confidence in Chinese economy, yuan-denominated assets

China's bond market has attracted net capital inflows in the first half of this year despite the US-China interest rate differential, reflecting global investors' solid confidence in yuan-denominated assets as well as the Chinese economy, officials and experts said on Friday.

Overseas investors bought Chinese onshore bonds worth nearly a net $79 billion in the first half, reversing net sales last year, said the State Administration of Foreign Exchange.

In the second quarter, foreign net purchases of onshore bonds amounted to $58.5 billion, reaching a comparably high quarterly level, SAFE said.

More than 1,100 global institutions, mainly central banks, from more than 60 countries have entered the onshore interbank bond market as at the end of June.

Investors bought Chinese bonds despite the high US-China interest rate differential amid the US Federal Reserve's aggressive interest rate hikes. The nominal yield on China's 10-year government bond was about 2.62 percent on Friday, versus 3.85 percent of 10-year US Treasury bonds on Thursday, according to market tracker Wind Info.

This has fully reflected the appeal of investment and allocation of Chinese bonds, Wang Chunying, deputy head and spokeswoman for SAFE, said at a news conference. "Looking ahead, foreign investors will continue to increase holdings and steadily allocate yuan-denominated assets."

Such assets offer the advantage of diversification benefits to global investors, Wang said, as the country's monetary policy cycle is different from that of many other major economies, which leads to a distinct bond market performance.

While the US Fed has raised interest rates at the sharpest pace on record since last year, China has instead cut interest rates moderately to support the economy as China's monetary policy adjustments are made mainly based on domestic conditions, according to Yi Gang, governor of the People's Bank of China, the country's central bank.

Also in contrast to many other economies, China has been prudent regarding interest rate adjustments to save the policy space for a rainy day and prevent excessive investment, Yi said in a recent paper published by the Economic Research Journal.

As China further eased monetary conditions, the onshore bonds rose in the first half and provided competitive real yields — nominal bond yields minus inflation rates — amid low domestic inflation but stubbornly high overseas inflation, leading to foreign investors' continuous interest in China's bond market, said Zhou Maohua, an analyst at China Everbright Bank.

"More importantly, the long-term uptrend of the Chinese economy has offered global investors stable, predictable returns on yuan-denominated assets."

Wang from SAFE said the administration will continue to optimize bond market opening-up with more products and services, adding that it is confident and capable of keeping the renminbi exchange rate generally stable at a reasonable and balanced level.

She said the country's foreign exchange market will face a more factorable external environment in the second half as the Fed is close to the end of rate hikes while China's economic recovery may stand out in a slowing global economy.

On Thursday, in a move that was interpreted as an attempt to stabilize the yuan's exchange rate, the PBOC and SAFE jointly raised the macroprudential adjustment parameter for cross-border financing of corporates and financial institutions to 1.5 from 1.25.

The hike will help boost capital inflows, increase onshore foreign exchange liquidity and stabilize foreign exchange market expectations, Wang said, vowing to effect more measures to anchor market expectations.

Echoing Wang's remarks, Eddie Yue, chief executive of the Hong Kong Monetary Authority, said he is overall optimistic about the onshore financial market's prospects of attracting capital flows via Hong Kong in the coming 12 months.

In an interaction with reporters in Beijing on Thursday, Yue said the HKMA is working to launch offshore futures of Chinese government bonds in Hong Kong at an early date to provide overseas investors with more tools to hedge against certain perceived risks associated with their onshore bond holdings.