SHANGHAI/SINGAPORE (Reuters) – Foreign investors are rushing into Chinese interbank debt instruments as mainland yields rise, seeking to exploit the advantage of favourable currency conversion rates and the refuge offered by the market’s low correlation with the rest the world.
U.S. dollar investors in particular are snapping up negotiable certificates of deposit (NCDs) — popular short-term debt instruments issued between banks for their financing needs — as the hedged return on these exceeds that on U.S. Treasuries.
WHY IT’S IMPORTANT
Foreign investors have not increased holdings of Chinese government bonds since September 2024 after a year of consistent purchases as the yuan weakened and the carry trade turned less attractive.
But they have increased holdings of NCDs since December, signalling a slight turn in capital flows into China and providing the yuan a buffer as a Sino-U.S. trade war simmers.
BY THE NUMBERS
Foreign investors held 1.14 trillion yuan ($157.51 billion)worth of NCDs at the end of February, the highest on record and marking the third consecutive month of buying.
The yield on one-year NCDs has jumped around 40 basis points (bps) this year to around 2%, while 10-year sovereign yields rose 20 bps to 1.89%.
Dollar investors also earn 2.8% when they swap their cash into yuan, which means NCD investments earn 4.8% versus just around 4% on one-year Treasuries.
QUOTES
“Global investors are trying to seek something that is very decorrelated… The price action is completely different to the rest of the world. That mindset attracts some of the flow back to China,” said Cary Yeung, head of greater China debt at Pictet Asset Management.
Rising local yields, a favourable hedging environment, and the prospect of U.S. interest rate cuts render Chinese bonds attractive for investors, said Wei Li, head of China multi-asset investments at BNP Paribas.
($1 = 7.2378 Chinese yuan renminbi)
(Reporting by Li Gu in Shanghai and Ankur Banerjee in Singapore; Editing by Vidya Ranganathan and Leroy Leo)
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