Foreign Investors Dumped Chinese Bonds for a 10th Consecutive Month

Foreign investors’ holdings of Chinese onshore bonds dropped to $477.3 billion at the end of November, marking a 10th straight month of outflows. The move comes as the troubled yuan and the widening divergence between US and China monetary policies continued to discourage investors from investing in yuan-denominated bonds.

Monetary Policy Divergence Between China and US Detering Investors From Buying Bonds

Global investors continued to sell Chinese onshore bonds for a 10th consecutive month in November, marking the longest-ever outflows streak. However, analysts believe that the strong outflows could ease in the coming period.

Foreign investors’ holdings of yuan-denominated bonds listed on China’s interbank market traded at 3.33 trillion yuan ($477.3 billion) at the end of November. This compares to 3.38 trillion yuan a month earlier, according to the report by the central bank’s Shanghai head office.

Another month of sales comes as a myriad of factors, including a weaker yuan, a strong dollar, and the widening monetary policy divergence between China and the US, continue to discourage foreign investors from buying Chinese bonds, according to market watchers. But some investors believe the ongoing outflow pressure could fade as the US looks likely to stop tightening its policy.

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Outflows Pressure Could Ease if Fed Turns Dovish

Analysts and investors think that the looming economic recession in the US will force the Federal Reserve to adopt a more dovish approach, despite the central bank’s expectations that it will take higher-than-expected interest rates to bring down inflation. Yesterday, the Fed raised interest rates by 50 basis points (bps) after delivering four consecutive jumbo hikes of 75 bps.

“With further narrowing in U.S.-China government bond yield differential recently, especially at the long-end, we think the bond outflow pressure may have eased further in November.”

– JPMorgan wrote in a note.

The yield gap between 10-year government bonds in China and the US stood at 78 bps at the end of last month, down from a 15-year high of 152 bps reached earlier in November. The gap continued to narrow in December to roughly 58 bps as of Dec. 15.

“Upward adjustment in Chinese government bonds yields improves yield differentials which will ultimately attract some foreign inflows back, especially when foreign investor positions are likely light after the hefty outflows this year despite index inclusion.”

– OCBC Bank analysts said in a note.

China’s zero-COVID policy is also one of the key factors driving off foreign investors, resulting in widespread protests across major Chinese cities last month. But the authorities have recently been easing the stringent coronavirus measures, boosting the stocks in mainland China and Hong Kong.

Do you think Chinese bonds will become appealing again to foreign investors if the Fed continues slowing the pace of interest rate hikes? Let us know in the comments below.