Foreign investors drawn by safe-haven assets, easier access
The Chinese economy may be showing signs of a slowdown, but foreign investors, particularly central banks and sovereign funds, appear unconcerned as they continue to pour large sums into purchasing Chinese government bonds. And they are poised to further increase their positions as greater access to the Chinese bond market is expected.
In the first 10 months of the year, foreign investors spent a total of $79 billion on China's sovereign bonds, and the figure is set to reach $100 billion by the end of the year, according to recent data from Morgan Stanley. That would lift foreign holdings of Chinese government debt to the second-largest level among emerging economies, behind that of Brazilian sovereign bonds, which is set to reach $115 billion.
Of the total foreign holdings of Chinese government debt in the first 10 months, 76 percent was held by foreign central banks and sovereign wealth funds, Morgan Stanley estimated.
"There are a number of factors behind this trend, but more than anything it is a vote of confidence by foreign investors in the Chinese economy," said Li Daxiao, chief economist at Shenzhen-based Yingda Securities.
Growth in the world's second-largest economy has slowed in recent months, sparking concerns among some foreign investors, despite Chinese officials' repeated reassurances that growth will be maintained in a "reasonable range."
In the third quarter of 2018, China's economy grew by 6.5 percent year-on-year, the slowest pace since the first quarter of 2009.
The buying of Chinese government bonds this year also followed decisions last year by two global rating agencies - Standard & Poor's and Moody's - to downgrade China's credit rating.
Demand growing
Despite some of the pessimistic views about the Chinese economy, foreign investors see Chinese government bonds as a safe-haven asset amid rising borrowing costs in major economies.
Chinese sovereign bonds have been the world's best-performing sovereign bonds this year, according to a Bloomberg report on November 19.
Slower economic growth, a bearish stock market and monetary easing measures from the central bank have spurred demand for Chinese sovereign bonds, according to the report.
Another factor has been greater access to the Chinese bond market, which is now the world's third-largest, behind those of the US and Japan.
The market used to be dominated by domestic players, but Chinese officials have take various measures to expand access for foreign investors. One of the measures was the launch of a bond connect between the Chinese mainland and Hong Kong in 2017.
The bond connect scheme has attracted as many as 400 foreign investors, including asset and fund managers, banks and sovereign funds, according to data released in August.
This is just the start for foreign interest in China's bond market, analysts say, as further opening of the bond market and more issuance of government debt is expected, which will attract more foreign capital.
"Chinese officials have repeatedly said that they will further open up the domestic bond market and that is in line with China's aim of attracting more foreign capital, as direct investment has slowed," said Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology.
However, there are some risks, Dong said, given that foreign investors could also offload their Chinese bonds if they see signs of trouble.
"So it is very important that we continue to carry out reforms to maintain stability in the economy and the financial markets," Dong noted.
