Foreign holdings of Chinese bonds up in July

Capital lured from overseas by stable yuan and high onshore rates

Foreign investors increased their holdings of Chinese bonds for a fifth consecutive month in July.

Holdings of Chinese treasury bonds by overseas investors rose by 37.82 billion yuan ($ 5.62 billion) in July to 487 billion yuan, according to Reuters’ calculations based on data from China Central Depository and Clearing Co, the official bond clearing house.

Increases in holdings of Chinese treasury bonds and some corporate bonds offset a net decrease in holdings of policy bank bonds.

Data showed that foreign in- vestors increased their holdings of all Chinese bonds by 37.8 billion yuan in July to 841.5 billion yuan.

For the first seven months of the year, foreign holdings of Chinese debt rose by 62.6 billion yuan.

While the monthly increase in holdings of all Chinese bonds was the highest since September 2016, the numbers appear to reflect Chinese money lured home from overseas by a stable yuan and relatively high onshore rates, rather than significant new interest among foreign buyers prompted by the Bond Connect scheme.

“In the early days, it’s mainly the overseas companies of Chinese institutions that are coming in [ through Bond Connect]. Later, there should be real overseas institutions. Overseas investors need time,” said David Qu, markets economist at ANZ in Shanghai.

Considered as a significant step toward increasing cooperation between capital markets in the Chinese mainland and Hong Kong, the Bond Connect scheme began on July 3 with the opening of “Northbound” trade, allowing eligible Hong Kong and overseas institutions to buy and sell onshore bonds.

Since then, the program has been slow to take off as many overseas investors adopt a waitand- see attitude to increased participation in the onshore bond market.

The 7.05 billion yuan in aggregate first- day trading volumes through Bond Connect represented a small fraction of trades in a market where a single trader chat group can produce daily trade volumes of 10 billion yuan.

Regulators have not released additional Bond Connect data since July 3.

In an e- mailed response to questions from Reuters, a spokeswoman at Hong Kong Exchanges and Clearing did not provide trading data, but said that 24 onshore institutions are participating in the program as dealers, providing quotations to more than 150 overseas institutional investors.

Market participants say that the potential inclusion of China’s $ 9 trillion bond market into major global bond indexes would prompt large inflows into the market, with some arguing that the Bond Connect itself removes some barriers to inclusion.