June 6, 2019 / 6:53 AM / 13 days ago

Policy-bank surge drives rise in offshore holdings of China yuan bonds

SHANGHAI, June 6 (Reuters) - A surge in holdings of policy-bank bonds likely lifted offshore holdings of Chinese yuan-denominated bonds to a record high in May, as their inclusion in a major global index aided inflows, and as rising risk aversion boosted the appeal of fixed income.

Foreign investors held a record 419.83 billion yuan ($60.74 billion) worth of bonds issued by China’s policy banks at the end of May, an increase of 50.75 billion yuan over the previous month, according to Reuters’ calculations using data from China Central Depository and Clearing Co (CCDC), the country’s primary clearing house.

In nominal terms, it was the largest monthly increase in offshore holdings of policy-bank bonds since CCDC began including foreign investor data in its monthly releases in June 2014. It was the biggest percentage increase since September 2016.

China’s policy banks, comprising China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China, help to fund Beijing’s policy initiatives.

Their bonds are not only highly liquid - nine of the interbank market’s most-traded bonds in May were issued by policy banks, according to the National Interbank Funding Centre - but offer higher yields than government bonds of the same tenor.

Offshore holdings of Chinese government bonds stood at a record 1.14 trillion yuan at the end of May, up 24.98 billion over the month.

Additional data on holdings of bonds traded on China’s interbank market, from the Shanghai Clearing House, were not yet available on Thursday afternoon. But the growth of government and policy-bank bond holdings recorded by CCDC indicates that total offshore holdings likely hit a new record in May for a third consecutive month.

May was the second in a 20-month inclusion process of Chinese government and policy bank bonds in the Bloomberg Barclays Global Aggregate Index. With a 6 percent weighting in the index, some analysts expect the move could draw $150 billion into Chinese fixed income.

Data from Bond Connect, which offers access to China’s onshore interbank market through Hong Kong, showed trading volumes and average daily turnover reached record highs in May, with trading concentrated in policy bank bonds, negotiable certificates of deposit and Chinese government bonds.

The rise in foreign bondholdings contrasts with heavy outflows from China’s equity market. Following five months of net monthly purchases starting in November, foreign investors sold a net 71.67 billion yuan worth of Chinese shares through the country’s Stock Connect programme in April and May, according to data from Hong Kong Exchanges and Clearing Co.

China’s benchmark Shanghai Composite Index fell 5.84% in May, its worst monthly performance since October amid mounting investor worries over slowing economic growth and an escalating trade war with the United States. ($1 = 6.9121 Chinese yuan) (Reporting by Andrew Galbraith; editing by Gopakumar Warrier)

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