Panic selling of Chinese bonds by foreign investors
Apr 09, 2022
Beijing [China], April 9 : Foreign investors reduced their holdings of Chinese bonds by more than USD 15 billion in March, a record high and the largest withdrawal from China in a single month. It was the second month in a row that foreign investors sold Chinese bonds. Massive outflows from China will continue in April, based on data collected by market research, the Wall Street Journal reported on Friday.
According to the report, analysts believe that possible factors for investors to sell include concerns about the geopolitical risks of investing in China, broader economic uncertainty, and China's market yield advantage over the US bonds is waning. International investors also pulled more than USD 7 billion from onshore Chinese equities through the Hong Kong market in March.
Some international fund managers were concerned about holding Chinese assets after Western countries imposed tough economic sanctions on Russia. In addition, with Russian assets in the US, Japan and Europe effectively frozen, the Russian central bank is likely to reduce its holdings of Chinese bonds to raise cash and repay foreign debt.
The flight was noteworthy because authorities had avoided major outflows in previous market stress events, including COVID-19, and the trade war with the United States.
In addition, global funds have begun to dwindle in buying Chinese debt as the US and Chinese central bank's monetary policies move in opposite directions which have made the yield gap between Chinese benchmark bonds and the US Treasuries virtually disappear.
The extra yield on Chinese sovereign bonds relative to the US counterparts had fallen to 0.12 percentage points as of Thursday, according to FactSet. In 2021, Chinese sovereign bonds offer an extra 2 percentage points over their US counterparts.
Data released by China Central Depository and Clearing Co Ltd. (CCDC) on Friday showed that foreign institutional investors reduced their holdings of Chinese interbank bonds for the second consecutive month in March, reaching USD 6.2 billion; Holding Chinese government bonds, the scale is 8.1 billion US dollars, which is the highest monthly outflow in history.
China is the world's second-largest bond market, with foreign investors holding about USD 561 billion in Chinese bonds, and overall, March's withdrawals were small. But the flight of Chinese investment will continue as the global economic downturn worsens due to the Russia-Ukraine war.
