In the Era of Zero Interest Rates... Global 'Hot Money' Flocks to China's Bond Market

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Foreign capital is pouring into China's capital market. As central banks around the world have successively declared 'zero (0) interest rates' due to the novel coronavirus infection (COVID-19), China's bond market, which offers relatively higher interest rates, is attracting investors' attention. Although U.S. President Donald Trump has emphasized the need to decouple economically from China, foreign investment in China is expected to continue for the time being.

On the 22nd, Hong Kong's South China Morning Post (SCMP) reported, citing data released by China's State Administration of Foreign Exchange, that foreign investors' net purchases of Chinese bonds last month reached $19.4 billion (about 23.5 trillion won), a 104% increase compared to April. During the same period, foreign exchange transactions conducted through Chinese banks amounted to $23.8 billion, a 61% increase from the previous month. SCMP interpreted this as an increase in the movement among Chinese individuals and companies to convert dollars into yuan.

Accordingly, the proportion of foreign capital within mainland China is increasing. According to Bond Connect, the scale of Chinese bonds held by non-residents in mainland China was about 2.426 trillion yuan (approximately 415.9 trillion won) as of the end of last month. The share in the overall bond market reached 2.6%, marking an all-time high. Looking at May alone, foreign investors' holdings of Chinese bonds increased by 114.6 billion yuan, the largest increase in 18 months.

This phenomenon is interpreted as a result of monetary policy easing by major central banks, including the U.S. Federal Reserve (Fed). As government bond yields in the U.S., Japan, and Europe have fallen sharply, funds have flowed into China's capital market, which offers relatively higher interest rates. Robin Singh, Morgan Stanley's chief China economist, said, "Overseas investors are showing great interest in the Chinese bond market due to relatively high government bond yields," adding, "The annual inflow of funds into China could reach $100 billion."

Currently, China's government bond yield exceeds 2.8%, which is four times the U.S. yield at around 0.6% and 200 times Japan's yield at about 0.01%. On this day, China's effective benchmark interest rate, the one-year Loan Prime Rate (LPR), was held steady at 3.85%.

The inflow of foreign capital into China is expected to continue for the time being. Due to the ongoing accommodative monetary policies amid the COVID-19 impact, and with the People's Bank of China (PBOC) removing investment limits for qualified foreign institutions last month, the potential for foreign funds to flow into China has increased further. By the end of last month, 828 overseas institutions, including foreign central banks, had invested in China's bond market. Among them, 12 institutions held Chinese bonds for the first time, according to SCMP.

The biggest variable in investors' interest in China is President Trump's negotiation strategy. Since President Trump has repeatedly demanded decoupling from China, the U.S.-China trade war is likely to act as an investment risk. On the 17th, Robert Lighthizer, U.S. Trade Representative (USTR), stated that decoupling from China is not a policy option, but the next day, on the 18th, President Trump denied this on Twitter, emphasizing, "The United States clearly reserves the option of complete decoupling from China under various conditions."

This content was produced with the assistance of AI translation services.