Foreign Investors Cut Holdings of Chinese Bonds

Foreign investors have cut their holdings in the Chinese bonds by more than $15 billion in a record monthly retreat from the second-largest bond market in the world.

The selldown had multiple triggers, including geopolitical risks of investing in China, broader economic uncertainty, and a diminished market yield advantage over US bonds, analysts said. Last month, global investors also took out more than $7 billion from domestic stocks through a trade link with Hong Kong.

Investors around the world dumped 51.8 billion yuan ($8.1 billion) worth of Chinese government bonds in March, according to figures released by China Central Depository & Clearing Co on Friday.

They also eliminated other types of yuan-denominated bonds, including some $6.2 billion worth of bonds issued by state-owned lenders known as policy banks. This was the second straight month of total outflows in the market.

The extra yield Chinese government debt offers over equivalent US Treasury notes, which was more than 2% points at the beginning of last year, plummeted as the two central banks moved in opposite directions.

The yield gap is likely to narrow further in the coming months, and at some point, both the short- and long-term Chinese Treasuries will yield lower than the US binds, said Zhaopeng Xing, a senior China strategist at Australia & New Zealand Banking Group.