June 6, 2019 / 9:27 AM / 12 days ago

UPDATE 1-Policy-bank bond surge lifts offshore holdings of Chinese bonds

* Offshore investors hold 1.88 trln yuan in China bonds at end-May

* Policy-bank bond holdings jump to record 419.83 bln yuan

* Stock market see 71.67 bln yuan in outflows in April-May (Updates to add Shanghai Clearing House data)

SHANGHAI, June 6 (Reuters) - A surge in holdings of policy-bank bonds 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, that 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.

Total offshore holdings of all bonds traded on the interbank market rose by 109.28 billion yuan from a month earlier to a record 1.88 trillion yuan as of May 31, according to data from CCDC and the Shanghai Clearing House, which published data late on Thursday afternoon.

It was the biggest such jump since June 2018.

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 Jacqueline Wong

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