Net foreign capital inflows despite rising volatility confirm strong appeal

Foreign investors will continue to increase their exposure to Chinese bonds, thanks to the country's ongoing economic recovery and stable monetary policy, officials and experts said on Tuesday.

Yuan-denominated bonds saw net foreign capital inflows in October, sources close to the State Administration of Foreign Exchange said.

Despite the rising volatility in the global financial market last month, the Chinese bond market ran steadily. The country's 10-year treasury bond saw its yield only moderately fluctuate, showing strong appeal to foreign investors. The investment value of renminbi assets in terms of diversifying risks has thus become increasingly noticeable, the sources said.

As China's economic growth steadily recovers and the country carries on high-standard opening-up in the financial market, there is still much room for foreign investors to further increase their position in renminbi bonds, the sources said.

The northbound leg of the bond connect mechanism linking the Chinese mainland and Hong Kong markets, via which foreign investors buy into the Chinese onshore bond market, saw its daily trading value in September rise 1.5 percent from a month earlier to 34.5 billion yuan ($4.7 billion), the Hong Kong-based Bond Connect Co Ltd said.

Treasury bonds and bonds issued by the Chinese policy banks such as the China Development Bank were the most actively traded securities in September, accounting for 46 percent and 37 percent of the monthly trading value, respectively.

Robert Tipp, head of global bonds of New Jersey-headquartered PGIM Fixed Income, said China's economic size, economic drivers and stimulative policies will bring investment opportunities that, arguably, cannot be found anywhere else in the world, as the holding of Chinese assets can diversify investors' portfolios.

China's bond market has performed differently over the past 18 months when globally the financial markets appeared to be in the grip of bears. If the Chinese market can realize comparatively faster growth in the long run, it will provide investment opportunities and help reduce overall market volatility, given the weak correlation between the Chinese market and the rest of the world, he said.

Li Bing, head of Asia-Pacific at Bloomberg, agreed that China's independent and stable monetary policies, combined with the country's economic size and growth potential, will continue to attract foreign investor attention. The trend of foreign investors' increasing exposure to renminbi assets has not changed, he said.

Freddy Wong, head of Asia-Pacific for Invesco Fixed Income, said more foreign investors will seek opportunities in the high-yield bonds in the Chinese market as liquidity further escalates.

Xia Yinyin, credit research analyst with UBS Securities, admitted that the soaring yield of US treasury bonds and renminbi depreciation pressure will exert a negative impact on foreign capital inflows into the Chinese bond market in the second half of this year.

But given the favorable policies to facilitate investors' moves in the Chinese bond market, including the latest ones jointly released by the country's top financial regulators in mid-July, as well as the renminbi's rise among the world's top currencies, overseas institutions will continue to increase their holding of renminbi bonds.

This is particularly true of Chinese bonds as they have been included in the FTSE World Government Bond Index in late October 2021, she said.