Foreign institutions pile into Chinese government bonds

  • December 11, 2018

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Foreign institutions are on track to pump almost as much money into Chinese government bonds this year as the entire stock of overseas investment in any other emerging market sovereign.

Non-residents poured a net $79bn into Chinese sovereign debt in the first 10 months of the year, a tally set to reach $100bn by the end of the year, according to figures from Morgan Stanley.

This would be only a little less than the $115bn foreign investors hold in Brazilian government debt, the biggest overseas position in the EM world, and ahead of their exposure to Mexico and South Korea, the next largest holdings.

Central banks and sovereign wealth funds have been in the vanguard of the push into Chinese government debt, with foreign asset managers so far largely absent from the buying spree.

Min Dai, a Morgan Stanley strategist, estimated that the Central Bank of Russia alone has accounted for half the inflows this year as part of a policy to cut its exposure to the dollar.

Central banks and sovereign wealth funds now own 76 per cent of the Chinese bonds held by foreign investors, Morgan Stanley estimated, helping push up the renminbi’s weighting in reserve assets from 1.07 per cent at the end of 2016 to 1.84 per cent in June.

The purchases by central banks is a reflection of the slow, but gradual progress Beijing is making in internationalising its currency, which is likely to push the renminbi’s weight in global reserves higher still. 

Asset managers are currently responsible for less than 6 per cent of overseas holdings of Chinese bonds. Yet they are likely to be the next major source of demand. 

Bloomberg has said it will start phasing Chinese bonds into its closely watched Global Aggregate Index from April. If index rivals Citi and JPMorgan followed suit, Mr Dai forecast an additional $140bn of index flows could be forthcoming between 2019 and 2021.

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