BEIJING, July 9 (Xinhua) -- China's yuan-denominated bonds are likely to maintain popularity among foreign investors in spite of the recent downward corrections and attract, as market players estimate, around one trillion U.S. dollars of fund inflow in the following five years.
The country's briefly tightening liquidity and improved economic fundamentals sent bond market into a bout of profound downward correction, which, however, did not change the direction of related foreign investment.
-- Foreign institutions keep adding yuan-denominated bond holdings
This year, global foreign direct investment (FDI) may contract nearly 40 percent from the 1.54 trillion U.S. dollars in 2019, the first time to be below the level of one trillion yuan since 2005, according to the World Investment Report 2020 released by United Nations Conference on Trade and Development (UNCTAD).
Despite the pessimistic FDI prospects overseas, China's actually utilized FDI in May reached 68.63 billion yuan, up 7.5 percent year on year, which pointed to a pleasant momentum of foreign capital inflow.
Unsurprisingly, China's bond market proved, at the same time, the "value pool" and has become the focus of foreign investment.
Statistics from China Central Depository and Clearing Co., Ltd. (CCDC), an important national financial market infrastructure, showed that foreign institutional investors held 2.19 trillion yuan of bonds under its custody by the end of June, hiking 33.48 percent year on year, and 82.94 billion yuan more than that in May.
Meanwhile, a total of 455 foreign institutions conducted bond transactions on China's interbank bond market via settlement agents by the end of June, five more than the comparable figure in May and 565 ones entered via the Bond Connect, a program between the Chinese mainland and Hong Kong allowing investors to trade bonds on each other's interbank bond markets, 17 more than the month prior.
In June, net purchases of Chinese yuan-denominated bonds by foreign institutional investors were 101 billion yuan as they purchased 408.1 billion yuan of bonds and sold 307.1 billion yuan of bonds.
As a matter of fact, China's bond market is more and more attractive for international investors alongside debut of related foreign exchange rate and interest rate risk management facilitating measures and approved entrance of foreign rating agency in the country.
In recent years, China kept taking measures to attract foreign investment into local bond market.
By the end of June, outstanding bonds in China's bond market mounted up to 108 trillion yuan, ranking the second worldwide. Nearly 900 foreign institutions from more than 60 countries and regions around the world entered into China's interbank bond market, holding in total 2.6 trillion yuan of bonds and up by nearly 40 percent annually in the past years since 2017. Their yuan-denominated bond holdings accounted for 2.4 percent of the total bonds undue by end-June in China and nine percent of their holdings of the type was Treasury bonds.
-- Chinese yuan-denominated assets seen safe haven
As part of U.S. financial media warned, the criticized responses to the COVID-19 pandemic in the U.S. and Europe have led to waning confidence of capital holders and might result in as much as 17 trillion U.S. dollars of capital fleeing from the U.S.
Analysts echoed the opinion, saying that impacts from the epidemic worsened worries over the further popularization of negative interest rates worldwide after developed economies maintained since the financial crisis super low interest rates or even negative interest rates till now.
Under such circumstances, the current 220 basis points (bp) high yield spread between 10-year Chinese and U.S. government bonds is extremely attractive for investors and alongside China's further opening up of financial and bond market, it is fairly rational for external capital to flow in at a faster pace in light of the accelerating production and work resumption and optimistic long-term economic growth prospects.
In 2020, China is the only country predicted in a report by International Monetary Fund (IMF) to record positive economic growth, possibly at 1.0 percent.
Within this year, bonds issued by China's government-baked issuers such as Treasury bonds, local government bonds, policy bank bonds and central bank bills, have significant advantages over other products in terms of investment value and foreign investment will remain important marginal incremental fund for China's bond market, said Zhou Guannan, chief analyst with fixed-income team of Hua Chuang Securities.
Some foreign institutions thus forecast that within the following five years, there might be around one trillion U.S. dollars of capital flowing into the Chinese yuan-denominated bond market, highlighting that when more markets such as the U.S., Europe, and India signaled inability in handling the pandemic, it is inevitable for global capital to seek safe haven and more stable growth engines.
From the second quarter, the growth gap between China and other countries is expected to further widen and China's economic fundamentals are likely to support it maintaining relatively higher risk free interest rates than other countries, likely to further back the exchange rate of Chinese yuan, held analysts from China International Capital Corporation Limited (CICC), the first venture-capital investment bank in China.
Based on these, China's bond yield is likely to keep rising in future along with the improving economic fundamentals. Therefore, China's bond products will be able to provide steady and continuous returns for investors, industry insiders said. (Edited by Duan Jing with Xinhua Silk Road, duanjing@xinhua.org)
A single purchase
