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Financials

UPDATE 2-Foreigners cut Chinese bond holdings for fifth straight month

(Adds data)

SHANGHAI, July 22 (Reuters) - Foreign investors cut holdings of Chinese bonds for a fifth consecutive month in June, official data showed on Friday, as a perception of political risk and a slowing economy sent funds fleeing from what was once a popular trade.

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 (PBOC) said on Friday.

Overseas institutional investors accelerated their pace of selling Chinese government bonds last month by selling 55.9 billion yuan worth of such sovereign debt, booking a fifth straight month of offloading, compared with an outflow of 14.2 billion yuan in May, according to data from depository institutions China Central Depository & Clearing Co.

China’s $20 trillion bond market has suffered continuous foreign outflows since February, as divergent monetary policy has wiped out China’s yield advantage over the United States, while rising geopolitical tension and fresh COVID-19 outbreaks in China have also dampened investor appetite.

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

More turmoil in China’s property markets, where some homebuyers are refusing to repay mortgages on unfinished apartments, could sour foreigners’ sentiment further, said ING’s China economist, Iris Pang, in Hong Kong.

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 a lockdown of Shanghai ended last month. “The story of U.S. 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 a slew of stimulus to aid a COVID-hit 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.

Their holdings are concentrated in government bonds and quasi-sovereign policy bank bonds.

$1 = 6.7673 Chinese yuan Reporting by Winni Zhou and Tom Westbrook; Editing by Shri Navaratnam and Bradley Perrett

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