Offshore investors add fewer Chinese bonds in Oct on wobbly yuan

SHANGHAI, Nov 5 (Reuters) - Offshore investors raised their holdings of Chinese government bonds at the slowest pace in 17 months in October as the yuan fell to its weakest levels in a decade, official data showed Monday.

Holdings of Chinese government bonds by offshore institutions rose by 20.3 billion yuan to 1.08 trillion yuan ($156.05 billion) in October, according to Reuters’ calculations using data from China Central Depository and Clearing Co (CCDC), China’s primary bond clearing house.

While total offshore holdings of government bonds rose for a 20th consecutive month to an all-time high, it was the slowest month-on-month percentage increase since May 2017, the data showed.

In addition, offshore investors reduced their holdings of bonds issued by China’s policy banks by 15.95 billion yuan to 326.1 billion yuan, the biggest monthly drop since January 2017. It was a sharp change from September, when a tax change announced by China’s cabinet drove investors to increase their holdings of the bonds at the fastest pace in 12 months.

China’s policy banks disburse loans to support government policies.

“The market was overwhelmed with fear in October, especially with the quick depreciation in the RMB (Chinese yuan),” said Gary Ng, an economist at Natixis in Hong Kong. “Some foreign investors may have just adopted a ‘wait and see’ approach, and did not roll over their position in policy bonds.”

China’s yuan fell to a 10-year low in late October, squeezed by slowing growth at home and rising headwinds from the Sino-U.S. trade war. The interest rate gap between the two countries has also narrowed as the U.S. Federal Reserve tightens policy even as China eyes further stimulus to support its economy.

The spread of 10-year Chinese Treasury bonds over their U.S. equivalent was at 37 basis points on Monday, according to Refinitiv Eikon data, down from 150 basis points at the end of 2017.

As policy bank bonds are relatively liquid, “we cannot rule out that these bonds were more used to reflect the desire to reduce exposure” by foreign investors, said Frances Cheung, head of macro strategy for Asia at Westpac.

In total, foreign investors increased their overall holdings of all Chinese interbank market bonds cleared through CCDC by 253 million yuan, an increase of just 0.02 percent from a month earlier.

$1 = 6.9207 Chinese yuan Reporting by Andrew Galbraith; Editing by Rashmi Aich