Overseas Investments in Chinese Bond Market Top $500 Billion, Up by 49% in 2020

Global investor interest in Chinese bonds soared to new heights in 2020. According to the research data analyzed and published by Stock Apps, foreign holdings of Chinese interbank bonds stood at 3.25 trillion yuan ($502 billion) at the end of December 2020.

The figure marked a net increase of 1.07 trillion yuan from 2019, translating to a growth of 48.8% year-over-year (YoY). It is the first time that the holdings have crossed the $500 billion threshold.

At the end of 2017, they stood at 1.15 trillion yuan and represented a 1.55% share of the country’s bond market. Compared to the current total, the figure has nearly tripled in that duration.

Notably, foreign holdings of Chinese interbank bonds only account for 2.7% of the total Chinese bond market. Based on a report by China’s central bank, the total market had a value of 115.7 trillion yuan ($17.9 trillion) at the end of November 2020.

Overseas investments in Chinese government bonds (CGBs) reached a record 1.88 trillion yuan ($290 billion) at the end of December 2020. It marked a 44% growth YoY.

Moreover, quasi-sovereign policy bank bond holdings by foreigners skyrocketed 84.4% from 2019. They reached a record high of 919.18 billion yuan ($142 billion). Their popularity stems from the fact that they are easier to trade and offer higher returns than CGBs.

China’s Bonds Yield Recovers to 3% vs. 1% for US Treasuries

Among the factors making Chinese bonds appealing on an international scale are their relatively high yields.

Based on a study by Refinitiv, the spread of the 10-year CGB yield above 10-year US Treasuries soared to a high of almost 260 basis points by July 2020. As of January 7, 2021, they were still above 200 basis points.

While China’s 10-year bonds have a yield of over 3%, the 10-year US Treasuries yield slightly more than 1%.

US Treasury yield is above 1% due to expectations of stronger stimulus as well as the US Federal Reserve’s possible tapering of bond purchases. It fell from 1.9% at the end of December 2019 to a low of 0.54% in March 2020 at the height of the pandemic. By the end of December 2020 though, it had rebounded to the current level.

In contrast, China’s 10-year CGB had a yield of 3.2% at the end of December 2019, slumping to a low of 2.48% in April 2020. By the end of 2020, it stood at 3.15%.

Another factor behind the increased interest is the opening up of the market by regulators, which has made it easier to trade. In September 2020, China’s central bank together with other regulators unveiled new proposals aimed at simplifying the application process for foreign bond investors.

Additionally, three major index providers, JP Morgan, Bloomberg and FTSE Russell, added CGBs to their flagship indexes.

China’s Economy to Grow by 8% in 2021 against 3.5% for US

For foreign investors, China’s rapid economic recovery following the pandemic has also boosted confidence.

According to the World Bank, China’s GDP is projected to grow by 7.9% in 2021 compared to 2% in 2020. A Nikkei Asia report shows similar optimism, forecasting an expansion of 8.2%, the highest growth in almost a decade. In contrast, the global economy is set to grow at 4% in 2021 following a 4.3% contraction in 2020. On the other hand, US GDP is expected to grow at 3.5% in 2021 after a contraction of 3.6% in 2020.

Based on a report by Fidelity International, the aforementioned factors will continue to spur the growing interest in Chinese bonds by foreign investors.

CMSC analysts offer a slightly different outlook, forecasting foreign holdings of 900 billion yuan in Chinese bonds in 2021. Their projection is based on a narrowing yield spread, which is expected to make the bonds less appealing.

The increase in investments tied to the yuan has pushed the Chinese currency to its highest level in over two years. As of January 22, 2021, the US dollar was equivalent to 6.48 yuan. Comparatively, it was worth 7.16 yuan in May 2020. According to data from SWIFT, the Chinese yuan was the fifth most used currency for global payments. It accounted for about 2% of all transactions globally in 2020. For some perspective, the yuan only got 35^th spot globally in 2010 when SWIFT started currency tracking.

Lastly, Morgan Stanely predicts that by 2030, the yuan will have a 5% to 10% share of global foreign exchange reserve assets, up from 2% in 2020. That would place it behind the US dollar and the euro, overtaking the Japanese yen and British pound.