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Chinese Bonds Suffer Third Straight Month of Foreign Outflows

International holders of yuan-denominated Chinese bonds reduced their net positions by $16.1 billion in April, data show.


Cfoto/Zuma Press

Foreign investors cut their holdings of Chinese bonds in yuan by more than $16 billion in April, marking a third straight month of outflows.

Global investors started scaling back their investments in February, amid concerns about the geopolitical risks of investing in Chinese assets, and about the economic impact of China’s tough approach to Covid-19. Yields on Chinese sovereign bonds last month fell below those on equivalent U.S. Treasury notes for the first time in more than a decade, further reducing the former’s appeal.

International holders reduced their total positions by a net 108.5 billion yuan, the equivalent of $16.1 billion, according to data from two clearinghouses, the China Central Depository & Clearing Co. and the Shanghai Clearing House. That was slightly lower than the 112.5 billion yuan drawdown in March. Foreign holdings are largely, but not entirely, composed of Chinese government bonds and of bonds issued by large government-backed lenders known as policy banks.

Sellers in April included VP Bank AG, a financial institution based in Liechtenstein. The firm last June invested in Chinese government bonds for the first time, allocating about 2% of its discretionary mandates from wealthy clients to the asset class, said Felix Brill, VP Bank’s chief investment officer.

Mr. Brill said Chinese bonds’ significantly higher yields relative to U.S. Treasurys and European government bonds, and the yuan-denominated securities’ inclusion in global bond indexes, made them attractive at the time. Following its investment, Chinese government bonds rose in price as their yields fell, and some European investors earned returns as high as 16%—in part because the Chinese currency strengthened significantly against the euro.

In early April, VP Bank’s investment committee decided to close out its position in Chinese bonds and “lock in the profits,” Mr. Brill said. “It was such a good trade…everything went well over the last 10 months,” he said, adding that with rates rising elsewhere, the firm concluded that there were better investment opportunities in other types of bonds.

For years Chinese government debt offered a substantial yield advantage over Treasurys, with that extra return peaking at more than 2.5 percentage points in 2020. But the two bond markets have switched positions this year, as the U.S. Federal Reserve has begun to raise interest rates while the People’s Bank of China has eased policy moderately to soften the economic impact of a fresh wave of Covid-19.

As of Tuesday, the 10-year U.S. Treasury yield stood at 2.969%, 0.15 percentage points higher than its Chinese counterpart, according to FactSet.

Rob Drijkoningen, a senior portfolio manager at Neuberger Berman and co-head of its emerging markets debt team, said the big price gains in Chinese government bonds are likely over for now as China’s central bank is unlikely to significantly ease monetary policy.

In addition, “the yield pickup is unlikely to come back anytime soon,” he said, referring to the gap between yields on Chinese government bonds and U.S. Treasurys. He added that global investors’ willingness to invest in Chinese assets has also been affected by Russia’s invasion of Ukraine earlier this year and U.S.-China political tensions.

Still, Mr. Drijkoningen said foreign institutions with a long-term, strategic view on investing in China are likely to continue putting money into Chinese bonds.

April’s decrease included a net reduction of 42 billion yuan, or the equivalent of $6.2 billion, of holdings of onshore Chinese government bonds, figures released on Tuesday by the CCDC showed. Foreigners also dumped $6 billion of notes issued by policy banks, the data showed.

The total value of foreign holdings dropped to 3.768 trillion yuan, or about $559 billion. That was the lowest reading since last July.

Flows in and out of Chinese equities have been less consistent. Global investors bought a net 6.3 billion yuan, or the equivalent of $935 million, of Chinese domestic stocks via the Stock Connect trading link in April, after a net sell down of about $7 billion in March, Wind data shows.

As of Tuesday, global investors had dumped the equivalent of $1.7 billion of Chinese stocks this month.

Write to Rebecca Feng at rebecca.feng@wsj.com and Serena Ng at serena.ng@wsj.com

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