Foreign investors retreat: Massive sell-off of Chinese government bonds

Foreign investors have significantly reduced their holdings of Chinese government bonds in recent months, marking a retreat from a previously popular and profitable trading strategy.

This shift follows Beijing's efforts to support its currency, which initially attracted over $130 billion in investments between November of last year and August, Caliber.Az reports referring to foreign media.

The strategy involved lending dollars to Chinese institutions and using the resulting renminbi to purchase Chinese bonds, offering returns of up to 6%, considerably higher than US Treasury yields. However, the situation changed dramatically after Beijing announced a substantial stimulus package in September, leading to a sell-off in Chinese government bonds and a rebound in the renminbi. This caused losses for investors who had heavily invested in the trade.

As a result, foreign investors sold a net total of Rmb275.8 billion (approximately $38 billion) in Chinese debt during September and October, primarily in government bonds, according to data from the China Central Depository & Clearing and the Shanghai Clearing House. This figure includes an Rmb62.8 billion reduction in holdings of interbank negotiable certificates of deposit (NCDs) — a short-term government note favoured by many investors in this strategy — marking the largest monthly outflow of NCDs on record.

Gary Ng, a senior economist at Natixis, noted that “the cross-currency swap rates are no longer attractive enough for foreign investors to buy NCDs.” Ju Wang, head of greater China foreign exchange and rates strategy at BNP Paribas, echoed this sentiment, stating that the yield from this trade “has shrunk in recent months.”

Chinese state banks had previously benefited from this trading strategy, which helped stabilize the renminbi’s exchange rate. However, the wave of stimulus measures in September—such as monetary support for stock markets and debt swaps for local governments—led to a rapid 0.17% increase in 10-year Chinese government bond yields within just three days at the end of the month.

Increased volatility in bond prices, driven by central bank interventions and greater issuance by the Ministry of Finance, has further diminished the appeal of Chinese bonds for foreign investors, according to BNP’s Wang. Meanwhile, rising US Treasury yields, fueled by a sell-off linked to expectations that a Donald Trump victory in the US presidential election would reduce the likelihood of interest rate cuts, have made American bonds a more attractive option.

Looking ahead, Xiaojia Zhi, head of Asia research at Crédit Agricole, suggested that long-term foreign demand for Chinese government bonds may remain subdued due to a weakening renminbi amid a strong dollar and potential increases in US tariffs. Instead, risk-tolerant foreign investors may shift their focus to Chinese equities, as noted by Ng at Natixis.

By Tamilla Hasanova