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Foreign holdings of Chinese onshore bonds rose by the most in more than two years in September as overseas investors shrugged off concerns about China’s economy as they searched for higher yields.
Foreign investors raised their holdings of Chinese debt by 50.7 billion yuan ($7.60 billion) last month to 726.4 billion yuan, data from China’s main bond clearinghouse showed, the most since the Central Depository and Clearing Co began publishing the series in 2014.
Much of the increase was due to foreign institutional buying of Chinese government bonds, which rose by 41 billion yuan, according to Reuters calculations based on data from the official bond clearinghouse.
Foreign buying of Chinese bonds had hit a previous record in June, as concerns over depreciation of the yuan currency eased and investors eyed falling global yields after Britain’s unexpected decision to leave the European Union.
Some analysts also attributed the global surge of interest in Chinese debt to Beijing’s opening up its interbank bond market to more types of foreign investors in February and a relaxation of foreign exchange repatriation rules in May.
“We expect foreign inflows to remain strong and in 2017 look forward to the potential inclusion of onshore China bonds in emerging market bond indices,” Andre de Silva, head of global emerging markets rate research at HSBC, wrote in a note on Tuesday.
Volatility in China’s foreign exchange markets, sparked by the central bank’s unexpected decision to devalue the yuan by nearly 2 percent in mid-August 2015, has inhibited foreign interest until recently, analysts say.
Nonetheless, the pull of higher Chinese yields – with 10-year Chinese treasuries yielding nearly 3 percent against just 1.8 percent for the 10-year U.S. treasury – has apparently proved irresistible to many.
That trend could be unwound, however, if the yuan turns volatile again.
On Monday, the yuan posted its biggest one-day decline against the dollar since June, hitting six-year lows, as expectations of a U.S. interest rate hike in coming months supported the greenback and lifted U.S. yields.
Such a reversal in sentiment could add to Beijing’s worries about renewed capital outflows.
China’s foreign exchange reserves fell for a third straight month in September and by slightly more than markets had expected after the central bank intervened to support the yuan.