Foreigners Buying China Debt

Global investors made their biggest ever purchases of Chinese municipal debt in June, an indication of growing confidence in a market that’s becoming a global asset.

Overseas investors added 730 million yuan ($113 million) of local government notes, which began just five years ago, according to figures from ChinaBond. Although that’s minuscule compared to the 13.4 billion yuan ($2.07 billion) of sovereign debt they bought, it’s still a record gain based on data compiled by Bloomberg going back to 2018. The move also coincides with a further slowdown in purchases of sovereign bonds.

The amount of local government bonds that foreigners bought is very small still, but it does show a good sign of diversification from just China government bonds. Foreign investors are likely shifting some of their long-term China bond holdings into municipal debt for the yield pickup.

Becky Liu, head of China macro strategy at Standard Chartered Plc in Hong Kong

This riskier-but-more-lucrative sector worth about 27.2 trillion yuan ($4.21 Trillion) is still largely an arena for domestic commercial banks. The growing foreign interest comes as the yield premium between China’s benchmark 10-year sovereign bonds and U.S. peers of the same tenor has narrowed this year. At the same time, local authorities have also picked up the pace of issuance after an unexpected slowdown early in the year.

Reference:

Bloomberg, 2021-07-06, “Foreigners Go Deep Into China with Record Local Debt Binge”