Since September, foreign institutions have continued to increase their holdings of RMB bonds. The latest briefing on foreign institutional investment in the interbank bond market released by the Shanghai headquarters of the central bank shows that as of the end of October 2023, foreign institutions held 3.24 trillion yuan of bonds in the interbank market, accounting for approximately 2.4% of the total custody volume of the interbank bond market. This also means that foreign institutions’ net purchases of RMB bonds exceeded 40 billion yuan in October, and they have “increased” positions in the Chinese bond market for two consecutive months.
Relevant data shows that in October, overseas capital’s purchases of RMB-denominated bonds reached 42.2 billion yuan, a new high in the past four months. This includes about 12.3 billion yuan in government bonds and more than 29 billion yuan in policy bank bonds. The latter is mainly issued by the China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China.
Specifically, in terms of channels, one new foreign institutional entity entered the interbank bond market in October. As of the end of October, a total of 1,110 overseas institutional entities had entered the market. Among them, 541 companies entered the market through direct investment channels, and 814 companies entered the market through the “Bond Connect” channel (245 companies entered the market through both channels at the same time). In terms of types of bonds, the main types of bonds held by overseas institutions are treasury bonds, with a custody volume of 2.08 trillion yuan, accounting for 64.2%; followed by policy financial bonds, with a custody volume of 0.72 trillion yuan, accounting for 22.2%.
CCDC previously released a monthly report on the business of overseas institutions in the inter-bank market for October 2023, which showed that as of the end of October, the total amount of bonds held by overseas institutions in CCDC was 2.86 trillion yuan. Among them, the custody volume of the “Global Connect” channel was 2.28 trillion yuan, the custody volume of the “Bond Connect” channel was 585.6 billion yuan, and the custody volume of the “Global Connect” channel accounted for 79.54%. In addition, the total transaction settlement volume of overseas institutions in CCDC in October was 1.12 trillion yuan. Among them, the settlement volume of spot securities transactions on the “Global Connect” channel was 312.8 billion yuan, and the settlement volume of repurchase transactions was 194.1 billion yuan, totaling 506.9 billion yuan; the settlement volume of spot securities transactions on the “Bond Connect” channel was 611.2 billion yuan.
It should be pointed out that although the “team” of foreign investors participating in China’s bond market is growing, since the beginning of the year, due to the intertwined impact of the Federal Reserve’s interest rate hikes, high interest rate differentials between China and the United States, and reduced investor risk appetite, the demand for RMB bonds held by overseas institutions has There have been some repetitions and the overall trend has weakened. Data show that as of the end of October, the scale of RMB bonds held by foreign institutions decreased by more than 100 billion yuan compared with the beginning of the year. In the first 10 months of this year, foreign institutions reduced their holdings of RMB bonds in five months and increased their holdings of RMB bonds in five months.
“One of the key factors influencing the behavior of foreign investors in buying and selling RMB bonds is U.S. bond yields. Since the beginning of this year, U.S. bond yields have continued to rise, driving the interest rate differential between China and the U.S. to become inverted and continue to widen. Recently, the 10-year U.S. bond yield has increased It set a 16-year record and once touched 5%, affecting global capital flows.” A person in the bond market said.
However, as the current monetary policy tightening in major developed economies approaches the end, this situation is expected to ease. Recent cross-border capital flows have shown signs of warmth.
“Since October, as short-term factors such as seasonality in my country’s cross-border capital flows have weakened, cross-border capital has shown a net inflow.” Wang Chunying, deputy director and spokesperson of the State Administration of Foreign Exchange, recently commented on foreign exchange receipts in the third quarter of 2023. When answering a reporter’s question, Xi Jinping said that overall, my country’s foreign exchange market continues to have a basic pattern of stable expectations and rational trading.
“Regulators continue to listen to the voices of international investors and continue to improve the infrastructure of the domestic bond market. It is expected that the opening of the bond market will continue to advance in the future, and international bond investors will also continue to increase their allocation of domestic RMB bonds.” Chief Economist of CITIC Securities Expert Mingming previously said that in the future, RMB bonds will provide investors with more diverse investment options and help diversify investments. Since the beginning of this year, the expectations of the bond market have changed, providing investors with more trading opportunities. In the long term, with the advancement of RMB internationalization and the slowdown in overseas central banks’ efforts to control inflation, international funds are expected to show a net inflow.
“With the transformation of the interest rate environment and the continued advancement of China’s foreign policy, the level of foreign investment and financing is increasing simultaneously. In the second half of the year, overseas institutions gradually increased their holdings of domestic RMB bonds. This was mainly due to the Federal Reserve’s monetary policy gradually raising interest rates to its peak. The spread between U.S. bond yields and Chinese bond yields will gradually narrow; secondly, the exchange rate will also bring additional income to investors investing in RMB assets.” said the above-mentioned bond market person.