Intriguing Shift: Foreign Investors Reduce Holdings in China's Onshore Bonds for the First Time in a Year

Foreign investors reduced their onshore yuan bond holdings for the first time since August 2023, as a stronger yuan made hedged onshore bonds less attractive. According to a statement from the central bank's Shanghai head office, foreign institutions held 4.39 trillion yuan in bonds traded on China’s interbank market by the end of September, down from 4.52 trillion yuan a month earlier.

Wang Ju, a strategist at BNP Paribas, commented that while opportunities for higher yields through hedging are lessening, yuan bonds remain a good market hedge against further easing in global carry trade and major risk aversion events. The decline in foreign holdings of yuan bonds last month was largely seen in government bonds, which fell by 110 billion yuan.

Chinese government bonds have experienced a record surge since the beginning of the year, with long-term bond yields reaching record lows as investors seek safe havens. Market participants are awaiting the outcome of the U.S. elections on November 5 to gauge sentiment towards Chinese assets, which may affect the appeal of the yuan and onshore bonds.

China's foreign exchange regulator stated at a press briefing on Tuesday that foreign appetite for yuan assets has increased, and overseas investors have boosted their onshore stock purchases since the end of September.