Overseas funds offloaded Chinese sovereign bonds in August, cutting holdings to the lowest in almost five years and piling pressure on a debt market already reeling from a shift by investors into stocks.
Holdings by foreign institutions fell for a third straight month in August to 2.01 trillion yuan ($282 billion), the lowest level since January 2021, according to Chinabond data. That represented 5.2% of the total outstanding amount of Chinese sovereign debt as of end-August, according to Bloomberg calculations.
Foreign appetite for Chinese debt is waning, with yields trailing Treasuries. August’s selloff highlighted the shift as investors moved into local stocks, helping push the CSI 300 Index up more than 25% from April lows. Pressure may intensify after JPMorgan Chase & Co. said it will cut Chinese bonds’ weighting in its flagship emerging-market index, a change likely to spur further outflows.
“Foreign investors have shown more interest in China’s onshore equity market, while keeping low appetite for bonds given still relatively low absolute returns and eroded FX-hedged returns,” said Jeffrey Zhang, emerging-market strategist at Credit Agricole CIB.
Overseas investors also cut their exposure to negotiable certificate of deposits in August, with holdings sinking to the lowest since May 2024. The retreat extended a recent pullback, as investors unwound inflows built up since 2023 amid shrinking profits from NCDs using currency swaps.
{{/usCountry}}Overseas investors also cut their exposure to negotiable certificate of deposits in August, with holdings sinking to the lowest since May 2024. The retreat extended a recent pullback, as investors unwound inflows built up since 2023 amid shrinking profits from NCDs using currency swaps.
{{/usCountry}}“Looking ahead, foreign investors are likely to further trim their previous FX-hedged NCD holdings, while the overall pace of foreign outflow could slow down given gradual recovery of onshore carry and improved yuan outlook,” Zhang said.