(Yicai) Oct. 24 -- Foreign investors are showing signs of reversing this year's poor appetite for Chinese bonds and raised their holdings by CNY10 billion (USD1.4 billion) last month, the first increase since June.

Overseas institutions held CNY3.2 trillion (USD438.2 billion) of Chinese interbank bonds as of Sept. 30, about 2.4 percent of the total, according to the latest data from the Shanghai branch of the People’s Bank of China. Three new overseas institutions entered the market last month, bringing their ranks to nearly 1,110, the data showed. 

The trend is still down for the year, as foreign institutions sold about CNY200 billion (USD27.4 billion) of yuan-denominated bonds in the first three quarters. Foreign investors have been less keen on yuan bonds due to factors such as rising US interest rates, the wide gap between Chinese and US yields, and low risk appetite.

But the situation is expected to ease as monetary tightening in the major developed economies is coming to an end. The market has digested the effects of the rate hike cycle, and the US-China interest rate gap is expected to slowly return to normal, an industry insider said.

Bond yields in the United States are a major factor shaping the behavior of foreign investors in buying and selling yuan bonds. The 10-year US bond yield recently set a 16-year record, momentarily rising to 5 percent, affecting global capital flows.

Investors buy US bonds for their high yields, which affects the attractiveness of other risky assets, such as stocks, Shanghai Securities News reported today, citing Jerry Chen, senior analyst at Gain Capital. A strong US dollar will cause ongoing capital outflows from emerging markets, he added.

In China, cross-border capital flows have recently shown positive signs. As short-term seasonal influences on cross-border flows have weakened, capital has shown a net inflow this month, Wang Chunying, spokesperson of the State Administration of Foreign Exchange, said recently regarding third-quarter foreign exchange receipts and payments.

Editor: Emmi Laine