Foreign holdings of China sovereign bonds rose at slower pace in June

SHANGHAI: Foreign investors lifted their holdings of Chinese government bonds (CGBs) to a record high in June on attractive yield premiums, but the pace of increase slowed from a month earlier after Beijing moved to rein in a strengthening yuan.

Investors outside of China held CGBs worth 2.13 trillion yuan ($329.69 billion) at the end of June, according to data released Monday evening by China Central Depository & Clearing Co (CCDC).

That was up 0.6%, or 13.39 billion yuan, from a month earlier, the smallest monthly increase since March, according to Reuters calculations. Offshore investors held 10.3% of all outstanding CGBs, Reuters calculations showed.

Offshore holdings of highly liquid bonds issued by China's policy banks rose 1.1% from a month earlier to 1.02 trillion yuan, also a record. Offshore holdings of all bonds cleared through CCDC stood at 3.3 trillion yuan, up 1.1% from a month earlier.

Additional interbank bond market data from Shanghai Clearing House was not yet available on Tuesday morning.

The slower increase in holdings followed official warnings in late May about one-sided bets on yuan appreciation, and regulatory steps to stem the currency's rise. The yuan posted its worst month against the US dollar since August 2019 in June.

Analysts say yield premiums on Chinese bonds and their relatively low correlations with global markets continue to be attractive for offshore investors.

Refinitiv data showed that benchmark 10-year CGBs yielded 161 basis points more than 10-year US Treasuries at the end of June, widening from 147 basis points a month earlier.

"Foreign inflows are likely to be sustained on yield differentials and diversification benefits; however (the) next round of index-induced passive flows is unlikely to be as rapid as during 2019/2020," said Frances Cheung, rates strategist at OCBC Bank in Singapore.