SHANGHAI :
Foreign Capital Holdings in Yuan-Denominated Bonds Soar to New Highs, Favoring Short-Term Bonds
Yicai Global
DATE:  Aug 04 2017
/ SOURCE:  Yicai
Foreign Capital Holdings in Yuan-Denominated Bonds Soar to New Highs, Favoring Short-Term Bonds Foreign Capital Holdings in Yuan-Denominated Bonds Soar to New Highs, Favoring Short-Term Bonds

(Yicai Global) Aug. 4 -- Foreign capital holdings in the yuan-denominated bonds continued to increase in July, hitting new highs, the latest data show. Short-term bonds remain most attractive to foreign investors.

The yuan-denominated bonds held by foreign institutions amounted to a record-high of CNY841.46 billion (USD125.24 billion) in July. For the month, foreign institutions hiked their holdings by CNY37.786 billion (USD5.624 billion), representing the highest increase since October last year.

Rate securities beat other bond varieties with the holding rate expanding by CNY37.42 billion on a monthly basis to CNY793.86 billion in July.

The growth in bonds positions among foreign institutions is deeply connected to the implementation of the Bond Connect program, industry insiders told Yicai Global reporter.

The introduction of the Bond Connect program has accelerated foreign capital inflows, in part because of the attractiveness of domestic rate securities at yield level as compared to foreign bonds, said Xu Xiaoqing, chief economist and macro strategy director at DH Fund Management.

This attractiveness is clearly manifested in the mid-term and short-term bonds, Xu continued

The interest spread of Chinese and US government bonds, which is not particularly substantial in terms of 10-year long-term interest rates, expands when the term of the bonds narrows to three years to five years. Therefore, short-term government bonds are very attractive to foreign funds.

A large number of foreign institutions will choose short-term bonds when allocating funds to Chinese bonds, said Zhai Chenxi, TF Securities vice president.

In addition to interest spread, the influx of foreign funds is also related to gradual weakening expectation of the yuan depreciation, added Xu Xiaoqing.

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Keywords:   Debt Market,Capital Inflow,Monetary Policy,Interest Spread,Bond Connect