Foreign Investors Exit China Bonds for Fifth Straight Month

More turmoil in China's property markets, where some homebuyers are refusing to repay mortgages on unfinished apartments in over 300 projects, could sour foreigners' sentiment further. File photo: Reuters.

A slowing economy has driven foreign investors out of China bonds for a fifth straight month.

China’s $20 trillion bond market has suffered continuous foreign outflows since February amid rising geopolitical tension and lingering Covid-19 outbreaks.

In June, foreign holdings of yuan bonds traded on China’s interbank bond market totalled 3.57 trillion yuan ($527.5 billion) at the end of June, down from 3.66 trillion yuan a month earlier, the People’s Bank of China said on Friday.

The yield of 10-year Chinese central government bonds is roughly 12 basis points lower than that of their US counterparts, compared with a premium of nearly 130 basis points at the end of last year.

More turmoil in China’s property markets, where homebuyers are refusing to repay mortgages on unfinished apartments (in several hundred projects), could sour foreigners’ sentiment further, ING China economist Iris Pang said.

But with China’s fiscal health better than other big countries’, and growth clouds hanging over the rest of the world, she said outflows could slow and the yuan could recover some of what it had lost this year.

Already the pace of outflows has slowed and the lockdown of Shanghai ended last month. “The story of US recession is brewing, and China is starting to recover. I don’t think capital outflows will last very long,” Pang said.

China has also launched stimulus measures to aid an economy that grew just 2.5% in the first half.

China took fresh steps this month to lure foreign bond investors, saying it would cut service fees, improve overseas access to foreign exchange hedging, and streamline the process of opening accounts.

Foreign holdings in Chinese bonds more than tripled from 2019 to 2021, but remain relatively small, accounting for 2.9% of the interbank debt market, according to Friday’s data.

Reuters, with additional editing by George Russell

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George Russell

George Russell is a freelance writer and editor based in Hong Kong who has lived in Asia since 1996. His work has been published in the Financial Times, The Wall Street Journal, Bloomberg, New York Post, Variety, Forbes and the South China Morning Post.