Foreigners Cool on China Sovereign Bonds as Rout Hits Confidence
Foreigners Cool on China Sovereign Bonds as Rout Hits Confidence
(Bloomberg) -- Confidence among global investors in China’s bond market appears to be swaying following a recent rout that illustrated concerns about surging inflation, currency volatility and a cautious central bank.
Latest data showed that net purchases by foreign investors of domestically traded bonds in China dropped to 10.8 billion yuan ($1.54 billion) last month, sharply down from 88.6 billion yuan in September, according to Bloomberg calculations that combine data from ChinaBond and the Shanghai Clearing House. October’s level also marks its weakest since April, when it hit 6.02 billion yuan.
The abrupt shift in the buying momentum coincided with last month’s brutal sell-off in the $13.5 trillion bond market, the world’s second-largest behind that of the U.S., which pushed yields on government debt to a five-month high. But a pattern of fluctuating net purchases has persisted in recent months.
“Foreign investors are probably a bit spooked by the recent rise in yields and somewhat disappointing returns this year as PBOC remains cautious on easing,” said Eugene Leow, a fixed-income strategist at DBS Bank Ltd. in Singapore, referring to China’s central bank.
Despite the country’s slowest pace of economic growth since the early 1990s, China’s bond market has been largely heading south the past two months after soaring pork prices sent consumer inflation to a near-eight-year high.
The autumn rout also made Chinese bonds a laggard behind developed markets such as the U.S. and Germany as well as emerging-market peers like Brazil so far this year.
In a gesture to calm investors’ nerves, the People’s Bank of China cut the interest rate on a key one-year loan to banks last week by five basis points, the first such move since early 2016. However, the small scale of policy easing, as well as the central bank’s refusal to inject more cash into the financial system, has disappointed bond traders.
As trade tensions remain unresolved, an uncertain outlook for the yuan, whose strength in recent years has been a major driver behind foreign demand for Chinese bonds, has also weighed on investors’ minds.
To be sure, global investors have found China’s bond market a more appealing destination after Beijing granted them wider access and the nation’s debt joined the influential Bloomberg Barclays Global Aggregate Index in April.
Despite the periodic swings in demand, foreigners’ overall holdings of Chinese onshore bonds have continued to climb and hit a fresh record of 2.13 trillion yuan last month.
But in the medium term, analysts say they find few causes for optimism given the low probability of aggressive monetary easing by Beijing, which remains wary of inflationary pressures and a risk-laden banking system, as well as a glut of new debt offerings from local governments.
“We don’t see a strong catalyst to drive yields lower materially for now,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. in Hong Kong.
--With assistance from Molly Dai.
To contact the reporters on this story: Shen Hong in Singapore at hshen87@bloomberg.net;Helen Sun in Shanghai at hsun30@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins, Kevin Kingsbury
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