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Xinhua Silk Road
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Foreign capital inflows gather steam amid wider opening-up of China's bond market

April 09, 2021


Abstract : Foreign capital inflows into China's bond market gather steam in the first quarter of this year, as foreign institutions bought a total of 494.6 billion yuan of bonds in China's interbank market during the period, a year-on-year surge of 173.41 percent, according to China Foreign Exchange Trade System.

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Aerial photo shows the view of the Lujiazui area in Pudong, east China's Shanghai. (Xinhua/Ding Ting)

BEIJING, April 9 (Xinhua) -- Foreign capital inflows into China's bond market gather steam in the first quarter of this year, as foreign institutions bought a total of 494.6 billion yuan of bonds in China's interbank market during the period, a year-on-year surge of 173.41 percent, according to China Foreign Exchange Trade System.

Experts predict that the strong momentum is set to continue as China will further promote the opening-up of its bond market and optimize its market mechanism.

-- Continued foreign capital inflows into China's bond market

In recent years, foreign institutions have been increasing their holdings of Chinese bonds. In 2020, due to the combined effects of interest rate differentials and exchange rates, it has reached a new height.

In 2020, foreign institutions had increased their holdings of Chinese bonds by more than 1 trillion yuan, with their stock holdings exceeding 3 trillion yuan. 

In the first quarter this year, the momentum of increasing foreign capital inflows into Chinese bonds has continued as estimated.

From January to March, China saw 494.6 billion yuan of bonds purchased by overseas investors, marking a surge of 173.41 percent over the previous year.

To be specific, in January, foreign institutions increased their holdings of Chinese bonds by nearly 223 billion yuan. Despite the fewer trading days in February due to the Spring Festival holiday, the net increase of holdings reached nearly 90 billion yuan, higher than the same period of the previous year.

-- Attractive RMB assets

In recent years, the European Union (EU) has been plagued by the negative-yielding bonds, and the benchmark interest rates of the United States, Japan and other major economies have been at a record low. As a result, Chinese bonds featuring high yields and low risks, are attractive to foreign investors.

In particular, the central banks of major economies adopted the easing monetary policies to offset the impact of the pandemic in 2020, and thus the bond yields in the United States, the EU and other major economies dropped.

Thanks to the remarkable performance in fighting against the COVID-19 pandemic, China has been the first to realize economic recovery, bringing its economy to the normal level by the end of 2020, which further widened the yield gap between China and other economies. For example, the ten-year treasury bond yield gap between China and the United States reached the record high of around 250 base points in October.

Exchange rate fluctuations also affect foreign investors' bond purchases. The appreciation of RMB against the U.S. dollar during June to December of 2020 was a spur of the inflows of foreign capital.

However, the narrowing yield gap between China and the United States, and the increasing fluctuation of RMB exchange rate in January and February this year did not change the momentum of foreign investors' holding of Chinese bonds.

Analysts attribute this trend to the bright prospect of China's economy, the relatively high yield gap between China and other economies, and the stable exchange rate of RMB against the U.S. dollar.

-- Wider opening-up of China's bond market

Behind the continued increase in foreign capital, is the continuous deepening of the opening-up of China's bond market.

Experts believe that China will make it easier for foreign investors to invest RMB assets in the future.

China has paced up the opening-up of its bond market since 2010 when foreign institutions were allowed to enter into China's interbank bond market.

In 2013, Qualified Foreign Institutional Investors (QFII) were allowed to enter into China's interbank market. In 2016, foreign institutional investors were allowed to directly enter into China's interbank bond market (CIBM). In 2017, the "northbound" mainland-Hong Kong Bond Connect was formally launched. And in 2020, the People's Bank of China and other relevant departments released a series of policies and measures to optimize the process of various investment links of foreign institutions. 

With the deepening of openness and the optimization of market mechanism, Chinese bonds have been included in many major international bond indexes.

In late March, global index provider FTSE Russell confirmed to include Chinese government bonds in the FTSE World Government Bond Index (WGBI) from the end of October.

The FTSE is the last of the three major global index providers to include China's government bonds, following their gradual entries into the Bloomberg Barclays Global Aggregate Index from April 2019 and the Government Bond Index Emerging Markets suite of JPMorgan from February 2020.

The inclusions are great milestones for China's bond market, said Chen Jianheng, an analyst with China International Capital Corp.(CICC), adding that China may focus on the opening of the "southbound" bond connect and upgrading the "northbound" bond connect, including encouraging overseas institutions to participate in credit bond market, and further opening the repurchase market and derivative market.

(Edited by Li Shimeng with Xinhua Silk Road, lishimeng@xinhua.org)

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Keyword: foreign investment B&R Weekly China's bond market

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