BEIJING: Foreign investors’ purchases of Chinese bonds will probably surge more than fourfold in the coming two years as global central banks diversify their reserves. Monetary authorities and supranational organizations will lead buying of about $48 billion in 2017 and 2018, according to a Bloomberg News survey of 11 analysts. That’s more than four times the $12 billion of the whole of last year. Inflows have slowed to $8 billion so far in 2016 as the yuan’s 4.2 percent decline sapped investor confidence.
“There’s still huge potential for reserve managers to diversify slowly their reserves into the yuan,” said Paul Mackel, head of emerging-markets currency research at HSBC Holdings Plc. “The appetite from real money managers, such as pension funds and mutual funds, is again very, very high. If China is eventually included in major bond indexes, it could bring an average $80 billion-$100 billion annually over the coming years.”
While China opened up its bond markets in preparation for the yuan’s entry into the International Monetary Fund’s Special Drawing Rights on Oct 1, capital inflows have seen a limited impact. The scenario will change over time, with the Chinese currency accounting for as much as 10 percent of the world’s $11 trillion of foreign-exchange reserves in a decade’s time, according to Eswar Prasad, a Cornell University professor and former head of the IMF’s China division. Nine of the Bloomberg News survey’s 11 respondents put more than even odds of Chinese government debt being added to major bond indexes by the end of 2018. Inclusion would help bring $750 billion of inflows in the next 10 years, according to the median estimate in the poll.
PBOC Deputy Governor Pan Gongsheng said earlier this year that China will push for the inclusion of domestic notes in global measures such as those compiled by Citigroup Inc and JPMorgan Chase & Co. Citigroup said that it is seeking client feedback that can be used in any potential review, while JPMorgan said it has placed Chinese onshore government bonds on review to be included in its emerging-market indexes.
Chinese sovereign bonds have handed investors a profit in all but one of the past 11 quarters amid an asset famine, with a total return of 25 percent in the period. The mainland’s benchmark Shanghai Composite Index of stocks is down 12 percent for the year, the government is moving to curb rising property prices, while channels for moving money abroad have been choked as policy makers look to discourage the flight of capital.
SDR-driven inflows are already showing signs of picking up, with foreign investors’ holdings of Chinese onshore sovereign debt rising a record $6 billion in September, according to data from China Central Depository & Clearing Co. Many have been drawn by the nation’s higher yields: China’s benchmark 10-year sovereign debt yields 2.70 percent, compared with 1.72 percent in South Korea, 1.85 percent in the US and close to zero in Germany. The offshore yuan was trading at 6.7859 per dollar early Monday.
“The IMF’s acknowledgment of the yuan as a freely usable currency enables central banks to count yuan assets as part of their official reserves, rather than just foreign-currency assets,” said Becky Liu, senior greater China rates strategist at Standard Chartered Plc. “The nature of reserves investment is to get exposure to reserve currencies, instead of hedging everything back to the dollar.” Private players are on the way too. Pacific Investment Management Co will probably be onshore in China in a year or two, Asia Pacific head Eric Mogelof said at the Bloomberg Markets Most Influential Summit in Hong Kong on Sept 28.
