Foreign investors will continue to scale up their exposure to domestic bonds, thanks to China's robust economic fundamentals and prospects for healthy return, officials and experts said on Friday.
Despite the rising US dollar and the smaller yield advantage of Chinese government bonds, the net increase in foreign holdings of domestic bonds stood at $63.3 billion in the first quarter of the year, up 11 percent on a quarterly basis, said Wang Chunying, a spokeswoman for the State Administration of Foreign Exchange, the country's forex regulator.
In March, foreign investors added $3.3 billion worth of holdings in domestic bonds, lower than the historically high levels seen in February and January, but still higher than the same period of last year and 2019, Wang said during a news conference on Friday.
"The general trend of foreign capital increasing holdings (in domestic bonds) will continue based on current conditions," Wang said."China's overall economic and social development has always been stable, and major macroeconomic indicators are showing positive changes. This has provided the solid basis for foreign capital inflows."
Wang said that more than $130 billion, as projected by some market institutions, is expected to flow into domestic bonds as FTSE Russell gradually includes Chinese government bonds. Global index provider FTSE Russell said last month that it will add Chinese government bonds into its World Government Bond Index from October.
Wang's remarks follow apprehension in some market circles after bad-debt manager China Huarong Asset Management Co Ltd said it would delay its earnings report, while the China-US yield spread narrowed, potentially weakening the attractiveness of Chinese bonds to some extent.
The Huarong delay should not impede the trend of foreign investors scaling up holdings in Chinese bonds as "there are a lot of investment targets to be selected from,"Wang told China Daily on the sidelines of the news conference.
The China-US yield spread, as represented by the difference between the yield of 10-year Chinese treasury bonds and their US counterpart, has narrowed to about 1.6 percentage points as of Friday from about 2.5 percentage points at the beginning of August, according to market tracker Investing.com.
Despite the smaller yield spread, Chinese bonds still provide global investors with appealing returns in a world flooded with negative-interest assets, as well as diversification benefits and relative stability in asset prices, Wang said.
Renminbi-denominated assets have assumed some features of safe-haven assets, Wang said, adding that the share of foreign holdings in the domestic bond market remained low at 3 percent by the end of last year, leaving a large room for future growth as opening-up deepens.
Wang Qian, Asia-Pacific chief economist with the US-based Vanguard Investment Strategy Group, said Chinese bonds still provide "significantly" higher returns than the global level, especially when compared with developed markets."One would expect strategic foreign investors to continue adding Chinese stocks and bonds into their portfolios."
Wang from the SAFE said that given China's position as an importer of commodities, the rising international commodity prices may increase the country's foreign exchange payments, but the country's balance of payments situation remained healthy as exports grew briskly in the first quarter.
Current account surplus, which mainly records a country's import and export transactions, has fallen from the fourth quarter of last year based on preliminary calculations and should maintain a "reasonable" scale for the whole year as the recovering global demand supports China's exports, Wang said.
Official data showed that China's foreign exchange market performed steadily in the first quarter with generally balanced international payments and two-way fluctuation of the renminbi within a rather narrow range.
Chinese lenders sold $501.6 billion worth of foreign exchange and bought $590.2 billion in the first three months of the year, resulting in net purchases of $88.5 billion. In March, the net purchases came in at $19.7 billion, the administration said.