May 9, 2021

Tarantella Berlin

Specialists in law

Foreign Buying of Chinese Government Bonds Stalls

A huge run-up in foreign holdings of Chinese government bonds has stalled, with international investors hitting pause on their purchases as China’s interest-rate advantage over the U.S. has shrunk.

International ownership of Chinese government debt declined slightly in March to the equivalent of $313 billion, according to the China Central Depository & Clearing Co. Holdings fell about 1% to 2.04 trillion yuan, from 2.06 trillion yuan a month earlier.

That was the first drop in foreign investors’ positions since February 2019. It came in a month when the yuan weakened more than 1% against the dollar, after strengthening more than 9% from June through February.

Meanwhile, prices for U.S. Treasury notes and other global government debt have been falling, pushing yields higher. That has shrunk the extra yield that China’s sovereign debt offers over international rivals.

This spread has narrowed to about 1.6 percentage points, after topping 2.2 percentage points throughout the second half of last year, data from FactSet and brokerage Tullett Prebon shows.

Jason Pang, a Hong Kong-based portfolio manager at J.P. Morgan Asset Management, said he had recently taken some profits on Chinese government bonds, or CGBs, and redeployed funds into local-currency government bonds in Southeast Asian countries such as Malaysia and Indonesia.

“We now expect a rotation out of CGBs into other assets to capture more value,” said Mr. Pang. Still, he added that Chinese bonds had been more stable than bonds elsewhere so far this year, offering investors shelter from market volatility as prices fell and yields rose in other markets.

The dollar is likely to keep strengthening in the coming months, and U.S. Treasury yields are likely to rise further, with benchmark 10-year yields hitting 2% by mid-2021, said

Aidan Yao,

senior emerging Asia economist at AXA Investment Managers. As of Monday, the yield on the 10-year Treasury note was slightly less than 1.6%.

Mr. Yao said that meant China could see reduced inflows, or even further mild outflows, of foreign money from its sovereign-bond market in the near future. He said discussions with clients such as global pension funds and insurers suggested many investors were still learning about China’s onshore bond market, and said hedging was an issue.

Longer term, however, Mr. Yao expects global fund managers to increase their holdings, since they are very underweight compared with bond indexes they track, such as the Bloomberg Barclays Global Aggregate Index and benchmarks calculated by

JPMorgan Chase

& Co.

A third index provider, FTSE Russell, said recently it plans to add China to its World Government Bond Index over three years, a longer time frame than many investors and analysts expected. FTSE Russell is a unit of

London Stock Exchange Group

PLC.

Mr. Yao said further inflows into Chinese sovereign debt could reach $160 billion over the next three years. Similarly, Mr. Pang at J.P. Morgan Asset Management said he expects foreign holdings could total 15% of the Chinese government-bond market within three to five years. The current figure is about 10%.

So far, overseas investors have largely stuck to buying debt issued by China’s central government and by a handful of state-owned lending institutions known as policy banks. They have been slower to buy yuan-denominated corporate debt.

In total, their holdings of all sorts of onshore debt totaled 3.56 trillion yuan at end-March, the equivalent of $546 billion, according to figures compiled by Bond Connect Co.

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Write to Frances Yoon at frances.yoon@wsj.com

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