Economic recovery, firming yuan fuel foreign inflow to China’s bond market

BEIJING, Feb. 4 (Xinhua) — Overseas investors raised their holdings of Chinese bonds for the 26th month in a row in January, fueled by faster-than-expected economic recovery and a firming yuan.

Overseas investors held a total of 3.06 trillion yuan (about 473.6 billion U.S. dollars) of Chinese bonds in January, surging 62.09 percent from the same period last year, data from China Central Depository & Clearing Co. Ltd. showed.

The volume marked an increase of 5.96 percent from the end of 2020.

Market transactions were also robust, with trading volumes amounting to 588.3 billion yuan last month.

The growing appetite among global investors since 2020 stemmed from China’s stable economic recovery, widening spread of Chinese 10-year government bonds over their U.S. counterparts, as well as a firming yuan, according to Zheng Kuifang, an analyst with the China Construction Bank.

With a strong rebound in the fourth quarter, China’s economy expanded 2.3 percent in 2020, becoming the only major economy to achieve positive growth in the pandemic-ravaged year.

Although the yield of 10-year U.S. government bonds had gradually ticked up and the yuan’s exchange rate against the U.S. dollar stabilized, analysts expect the rush of buying into China’s bond market to extend into 2021 as the share of Chinese bonds in global asset allocation remained low.

Meanwhile, as global index-providers raise the weighting of Chinese government bonds in their benchmarks, foreign flows into the bond markets will continue to gather steam.

Overseas investors will likely plow 1.2 trillion yuan into China’s bond market in 2021, according to Liu Linan, head of Greater China Macro Strategy at Deutsche Bank.

By the end of 2021, the share of foreign holdings in yuan bonds will increase to 3.3 percent from the current 2.9 percent, while the share of foreign holdings in China’s treasury bonds will rise to 12 percent from the current 9 percent, Liu predicted.

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