China's Government Bond Investment Declines After 13 Months... US Attracting Global Capital

Overseas Investors' Holdings of Chinese Government Bonds Trend [Image Source= The Wall Street Journal]

[Asia Economy Reporter Park Byung-hee] It has been confirmed that global investors' holdings of Chinese government bonds decreased for the first time in 13 months. This is because the relative investment attractiveness of Chinese government bonds declined as U.S. Treasury yields rose. The recent depreciation of the yuan against the dollar is also analyzed as a contributing factor.

According to the China Central Depository & Clearing Co., Ltd. (CCDC), foreign investors' holdings of Chinese government bonds amounted to 2.044 trillion yuan last month. This represents about a 1% decrease from 2.061 trillion yuan in February.

The decrease in foreign investors' holdings of Chinese government bonds is the first since February last year. Foreign investors had been net buyers of Chinese government bonds for 12 consecutive months from March last year, increasing their holdings from 1.342 trillion yuan to 2.061 trillion yuan.

The narrowing yield spread between U.S. and Chinese government bonds, due to rising U.S. Treasury yields, is also a cause of the decline in Chinese government bond investments. The yield spread between 10-year U.S. and Chinese government bonds, which exceeded 2.5 percentage points at the early stage of the COVID-19 outbreak, has recently narrowed to about 1.6 percentage points.

Since the beginning of this year, expectations for U.S. economic recovery have increased, causing U.S. Treasury yields to rise sharply. The decrease in Chinese government bond investments is another signal that the U.S. is acting as a black hole attracting global funds due to expectations of economic recovery.

The depreciation of the yuan is also interpreted as a reason for the decline in Chinese government bond investments. The yuan rose more than 9% from June last year to February this year but fell more than 1% last month.

Looking ahead, with the possibility of rising U.S. Treasury yields and a strong dollar, the slowdown in Chinese government bond investments is expected to continue for some time.

However, there is an analysis that Chinese government bond investments will inevitably continue in the long term. This is because Chinese government bonds were included in the Financial Times Stock Exchange (FTSE) Russell World Government Bond Index (WGBI) last month. Funds tracking the FTSE index must continue to increase their allocation to Chinese government bonds. With inclusion in the FTSE index, Chinese government bonds have been incorporated into the world's three major government bond indices. Previously, they were included in the Bloomberg Barclays Global Aggregate Bond Index (BBGA) and the JP Morgan Global Emerging Markets Government Bond Index (GBI-EM).

Aidan Yao, Senior Economist at AXA Investment Managers, predicted that about $160 billion will be invested in Chinese government bonds over the next three years. Jason Fang, Portfolio Manager at JP Morgan Asset Management, also expects the current 10% allocation to Chinese government bonds to increase to 15% within the next 3 to 5 years.

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