Under the resonance of factors such as the end of the Fed's interest rate hike cycle and the continuous recovery of the RMB exchange rate, overseas capital has increased its position in domestic bonds.
Recently, Wang Chunying, deputy director of the State Administration of Foreign Exchange, revealed that the overall net inflow of foreign capital under securities investment has recently resumed, and the willingness of foreign capital to allocate RMB bonds has continued to increase, and the net increase in domestic bonds has continued in recent months. Among them, the net increase in foreign holdings of domestic bonds reached US$33 billion in November, the second highest value in history.
According to the latest data released by the Shanghai headquarters of the People's Bank of China, as of the end of November 2023, the scale of bonds held by foreign institutions in the interbank market reached 3.49 trillion yuan, an increase of about 250 billion yuan from 3.24 trillion yuan at the end of October, which is also the third consecutive month that foreign institutions have increased their holdings of RMB bonds.
In the view of industry insiders, the reason why overseas capital increased its holdings of domestic bonds on a large scale in November was mainly affected by five factors: First, the market generally expected the end of the Fed's interest rate hike cycle in November, which made a large amount of capital return to emerging markets. Second, the inversion of the interest rate gap between China and the United States has narrowed significantly since November, which has enhanced the attractiveness of China's treasury bonds; third, the RMB exchange rate has significantly stabilized and rebounded in November, further eliminating the "exchange rate loss" of overseas capital to increase their holdings of RMB bonds Fourth, China's economy has continued to stabilize and improve, which has further enhanced the investment safety of China's government bonds, and fifth, the Palestinian-Israeli conflict has continued to escalate since October, which continues to trigger strong safe-haven investment demand from global capital.
An emerging market investment fund manager pointed out to reporters that the overseas capital that increased its position in RMB bonds in November was mainly long-term capital such as overseas central banks and sovereign wealth funds. For a long time, they have been relatively less sensitive to the fluctuations in the inversion of the interest rate differential between China and the United States and the fluctuations of the RMB exchange rate, and have paid more attention to the role of RMB bonds in maintaining and increasing the value of their global portfolios.
In his view, the large-scale increase in China's domestic bonds by overseas capital in November may further enhance the momentum of the RMB exchange rate. Now, when they see that a large amount of overseas funds are pouring into China's domestic bonds on a large scale, they will inevitably follow up on investment, so that the RMB exchange rate will get stronger appreciation momentum, and at the same time, it will completely dispel the speculation of Chinese capital outflows.
Wang Chunying said that with the improvement of the internal and external environment, China's foreign exchange market will have more foundation and conditions to maintain stable operation in the future. Internally, the basic trend of China's economic rebound and long-term improvement has not changed, and the supporting role of the economy in stabilizing cross-border capital flows will be strengthened. Externally, the market expects that the Fed's interest rate hike process is approaching the end, and interest rate cuts may be gradually started in the future, and the US dollar interest rate and exchange rate are expected to fall overall. Overall, the favorable conditions for China's economic development are stronger than the unfavorable factors, and the foundation for the smooth operation of the foreign exchange market is more solid.
Multiple factors have driven overseas capital to embrace onshore bonds
"In November, foreign capital increased its holdings of RMB bonds, far exceeding market expectations. A Hong Kong bank foreign exchange trader told reporters. Although the market widely expected in November that the end of the Fed's interest rate hike cycle would bring a large amount of capital back to emerging markets, given the relatively slow recovery of China's economy, many Wall Street investment institutions expect that a large amount of capital returning to emerging markets may give priority to other emerging market high-yield bonds such as India and Southeast Asia.
In his view, with the release of the above data, many Wall Street investment institutions suddenly realized that Chinese government bonds are still the "first choice" for many overseas investment institutions to allocate emerging market bond assets.
The above-mentioned emerging market investment fund managers believe that an important reason for the large-scale net increase in overseas capital holdings of China's onshore bonds in November is that the market expects that China's relevant authorities will still adopt a relatively loose monetary policy, which will increase the probability of domestic bond price increases, so they are expected to gain considerable profit margin from bond price increases.
"In November, a lot of overseas capital has been increasing their positions in Chinese government bonds and government and financial bonds through Bond Connect and other channels, hoping to profit from China's loosening monetary policy. He analyzed.
According to the latest data released by the China Foreign Exchange Trade System, foreign institutional investors created a total of 1,657.3 billion yuan of domestic bond spot transactions in November, of which 1,010.6 billion yuan were bought and 646.8 billion yuan were sold, and the net purchase amount reached 363.8 billion yuan in the month, setting the highest monthly value in the year.
The reporter learned that another factor that cannot be ignored is that the inversion of the interest rate gap between China and the United States has narrowed suddenly, which has greatly boosted the attractiveness of the allocation of Chinese government bonds and government and financial bonds.
"In the financial market, there has always been an unwritten practice that during the widening of the inversion of the interest rate differential between China and the United States, some overseas investment institutions tend to reduce their holdings of domestic bonds and switch to U.S. Treasury bonds to arbitrage risk-free returns, on the contrary, if the inversion of the interest rate differential between China and the United States narrows significantly, they will quickly reverse the operation - re-increase domestic bonds to achieve better bond portfolio diversification. The emerging market investment fund manager noted.
In his view, the biggest capital force in the past three months to buy onshore bonds is still long-term capital such as overseas central banks and sovereign wealth funds. The reason for this is that with the steady increase in the proportion of RMB in the settlement of cross-border trade and investment, more and more countries have more and more RMB in their hands, and the allocation of domestic bonds has also increased accordingly.
The deep-seated reason behind this is that in view of the risk that the European and American economies may fall into recession next year, more and more central banks and sovereign wealth funds are also aware of the huge risk of investing most of their assets in the "European and American markets", and are accelerating the pace of diversification of foreign exchange reserve assets. At present, the high credit rating and good liquidity of China's government bonds can not only bring new value preservation and appreciation effects to the diversified allocation of foreign exchange reserve assets, but also further promote economic cooperation with China and jointly promote the steady development of the bilateral economy.
It is worth noting that the domestic bonds that foreign institutions increased their holdings in November were still dominated by government bonds and policy financial bonds (government and financial bonds). According to the data, as of the end of November, the main types of bonds under custody of overseas institutions were Chinese government bonds, with a custody volume of 2.2 trillion yuan, accounting for 63.0%, followed by policy financial bonds (government and financial bonds), with a custody volume of 0.77 trillion yuan, accounting for 22.1%.
The imminent "carrying effect" of offshore Treasury bond futures
In the view of industry insiders, the large-scale increase in overseas capital in November in onshore bonds may also be closely related to the upcoming launch of the 10-year Chinese government bond futures contract (hereinafter referred to as offshore treasury bond futures) by the Hong Kong Futures Exchange.
At the end of November, the Hong Kong Futures Exchange said it would launch a 10-year Chinese Ministry of Finance Treasury bond futures contract. Subject to regulatory approval and market readiness, the Treasury futures contracts are intended to begin trading in the first quarter of 2024.
The above-mentioned emerging market investment fund managers believe that the imminent launch of offshore treasury bond futures is further igniting the interest of overseas capital to increase their positions in onshore bonds. Specifically, first, overseas capital has found that the maturity strategy of holding Chinese government bonds has new hedging and risk hedging tools, which makes them more confident to increase their positions in Chinese government bonds, and second, many overseas investment institutions have clearly required them to have corresponding risk hedging tools when investing in the government bonds of emerging market countries. The launch of offshore treasury bond futures will enable Chinese government bonds to meet the asset allocation requirements of more overseas investment institutions, and include Chinese domestic government bonds in the investment scope.
"Therefore, the market generally expects that after the launch of offshore treasury bond futures, a large amount of new overseas funds will pour into the onshore treasury bond market and drive the price of Chinese treasury bonds to rise further. He analyzed to reporters.
In the view of the chief representative of a large European asset management institution in the Asia-Pacific region, the greater significance of the imminent launch of offshore treasury bond futures is that it allows more overseas funds to confidently adopt the strategy of holding treasury bonds to maturity, which will help reduce the price volatility of Chinese government bonds, further increase the safety and stability of their investment, and drive more overseas funds to increase the allocation of Chinese government bonds and government and financial bonds.
"In the past, when the inversion of the interest rate differential between China and the United States widened, many overseas investment institutions could only reduce their holdings of China's domestic government bonds and transfer funds to U.S. Treasury bonds to obtain higher risk-free returns, but this increased the price volatility of Chinese government bonds, which was not conducive to the robust demand for overseas long-term capital positions to maturity strategies. He analyzed to reporters. In this case, overseas capital rushed to increase its position in China's domestic treasury bonds on a large scale in November, which is also a kind of "expectation" for the early launch of offshore treasury bond futures to a certain extent.
The reporter also learned that since December, more and more overseas investment institutions are studying specific plans for hedging the risk of treasury bonds and government and financial bonds through offshore treasury bond futures. If the relevant research results are good, it may lead more overseas funds to further increase their holdings of Chinese government bonds and government and financial bonds, and drive the net inflow of foreign capital under securities investment to rise.
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