Foreign investors dropped a record debt of 18 billion. USD in denominated denominated debt last month as sales accelerated as rising US bond yields dampened the lure of holding Chinese debt.
Offshore investors sold Chinese onshore bonds for a net $ 113 billion. Rmb ($ 17.6 billion) in March, according to Financial Times calculations based on data from Hong Kong’s Bond Connect investment program. It took the outflow over the last two months to 193 billion. Rmb as concerns rose over China’s economic growth outlook and the declining interest rate advantage of debt over US-denominated bonds.
“This is by far the largest outflow since China began opening up its domestic bond market,” said Becky Liu, head of China’s macro strategy at Standard Chartered, adding that when combined with net sale of shares, foreign investors had dumped a total of about 234 billion. Rmb in Chinese securities over the past two months. She said the bank expected “sustained outflows” in the second quarter.
Overseas investors have for years turned to the Chinese bond market as a source of juicy yields, while Western economies embraced quantitative easing and record-low borrowing costs. This dynamic is now reversing as Western central banks raise interest rates and China seeks to mitigate economic disturbance of lockdowns to limit exacerbated Covid-19 outbreaks.
Expectations of Federal Reserve rate hikes like that combating rising inflation has pushed the 10-year US government interest rate up to 2.9 percent this week, while the expected easing from the People’s Bank of China has kept the Chinese 10-year interest rate anchored at around 2.8 percent in recent sessions. US interest rates have not exceeded those given by having more risky Chinese government debt for 12 years.
The deviation in policy also affects China’s currency, with the renminbi on Wednesday falling to its lowest point against the dollar since October 2021.
Jason Pang, a senior portfolio manager at JPMorgan Asset Management in Hong Kong, said the recent sale was partly spurred by global investors, who locked in profits after a year in which the relative outperformance of Chinese bonds made it “quite necessary” for many investors. who hoped. to deliver better than benchmark returns.
“I would not be surprised if we see more profit revenue [Chinese government bonds]”he added.
Investors and strategists said that while the yield advantage of the renminbi debt had been squeezed, payments on Chinese bonds still offered a significant premium over their US counterparts when adjusting for inflation.
“The big, long-term picture is not changing at all,” said Jean-Charles Sambor, head of emerging market debt at BNP Paribas Asset Management, adding that renminbi bonds still yielded returns that did not correlate with other major economies. “It does not matter to me that the diversification benefits remain extremely strong.”
Liu at StanChart said that despite the recent sales battle, she expected the pace of outflow to have already peaked and that the net inflow would return in the second half of the year. But she added that the gap between Chinese and US bond yields could limit the opportunities for policy makers in Beijing while struggling with declining growth.
Despite a wave of severe and economically disruptive shutdowns to curb China’s worst Covid-19 outbreak in two years, PBoC has remained cautious in its approach to stimulus, it stops with a dramatic easing in policy that could push interest rates even lower.
Aninda Mitra, head of Asia’s macro and investment strategy at BNY Mellon Investment Management, suggested that the central bank may have been “cautious” about the sharp rise in interest rate differentials due to high US interest rates because it could encourage greater outflows in the hunt of higher yields.
“The pull of foreign investors in the Chinese bond market has undoubtedly been reduced,” he said, adding that the pressure on capital accounts has become “more of a plausible risk”.