March 8, 2019 / 5:09 AM / a month ago

Foreign investors trim China bond holdings in Feb, policy bank bonds favoured

SHANGHAI, March 8 (Reuters) - Total holdings of Chinese bonds by offshore investors fell in February from a month earlier as a correction hit the domestic debt market, but investors took advantage of a tax break to stock up on policy-bank bonds, new data showed this week.

Offshore investors held Chinese yuan bonds worth 1.75 trillion yuan ($260.44 billion) at the end of February, according to Reuters’ calculations based on data released this week by Shanghai Clearing House and China Central Depository and Clearing Co, the country’s two main bond clearing houses.

That was about 2.5 billion yuan less than total offshore holdings at the end of January.

Offshore investors trimmed their holdings of Chinese central government bonds by 17.35 billion yuan to 1.08 trillion, from a record 1.1 trillion yuan at the end of January.

They also reduced holdings of negotiable certificates of deposit, a short-term interbank debt instrument, by 10.06 billion yuan to 191.29 billion yuan.

In contrast, investors added 20.89 billion yuan worth of bonds issued by China’s policy banks - China Development Bank, Export-Import Bank of China, and China Agricultural Development Bank - to their holdings in February.

Total policy-bank bonds held by offshore investors stood at 379.65 billion yuan at the end of February, a record high, Reuters’ calculations showed.

China’s policy banks disburse loans to support the government’s development initiatives.

In November, China said it would exempt foreign investors in China’s onshore bond market from taxes for three years.

The exemption makes highly liquid policy-bank bonds, which boast higher yields than central government bonds but effectively the same level of credit risk, more attractive investments.

Previously, taxes of as much as 16 percent on foreigners’ income from Chinese bonds erased most if not all of policy-bank bonds’ yield premium over tax-free government bonds.

Investors have in recent months cited expectations of monetary policy easing in China for rising global interest in Chinese bonds. But even as China’s economy grows at its slowest rate in nearly 30 years, officials have emphasised restraint, with broad easing seen as a last resort.

The yield on Chinese 10-year treasury bonds was at 3.167 percent on Friday, according to Refinitiv data, up from a low of 3.08 percent touched in February, as stronger risk appetite dulled the appeal of fixed-income investments.

China Development Bank’s July 2028 bond, the most actively traded bond in China’s interbank market in February according to the National Interbank Funding Center, yielded 3.6525 percent on Friday.

$1 = 6.7194 Chinese yuan Reporting by Andrew Galbraith; Editing by Sam Holmes

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