Foreign investors raised their holdings of China’s onshore bonds to a record $62 billion as of February

SHANGHAI: Foreign investors boosted purchases of China’s onshore bonds by 16% this year as some funds look at the yuan’s drop as a buying opportunity.

They increased their holdings to a record 384.1 billion yuan ($62 billion) as of February 28 from 331.9 billion yuan at the end of 2013, according to data from China Central Depository & Clearing and the Shanghai Clearing House.

Schroder Investment Management says renminbi debt is attractive after the currency’s 2.8% loss this year, Stratton Street Capital is applying to enter the onshore market and Western Asset Management doesn’t expect long-term depreciation.

“It has definitely become interesting at these levels to accumulate currency positions,” said Rajeev De Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder. He is considering adding to his yuan holdings after paring them in February.

Policymakers are seeking to discourage the accumulation of debt by allowing companies to default and by introducing more volatility in exchange rates and borrowing costs. China’s 10-year sovereign bond yield is 4.52% compared with 2.77% for similar U.S. Treasuries. “Yields at 4% and the currency’s appreciation prospects make Chinese government bonds extremely attractive compared to the nations with the same rating elsewhere in the world,” said Andy Seaman, London-based partner and fund manager at Stratton Street, which oversees $1.5 billion.

Sovereign Notes

Overseas investors hold just 1.3% of the total 28.9 trillion yuan of onshore debt, with 77% of that either sovereign bonds or notes issued by China’s three policy banks, says Bloomberg. In the US, overseas buyers account for 47% of Treasuries. China controls access to its domestic markets through the Qualified Foreign Institutional Investors program. As of last month, the State Administration of Foreign Exchange had approved $52.3 billion investment quotas for QFIIs, up from $40.8 billion a year earlier.

The foreign-exchange regulator also approved 180.4 billion yuan in investment by Renminbi QFIIs while China Securities Regulatory Commi- ssion Chairman Xiao Gang said on March 11 that more FIIs will be allowed to enter the local market.

Under-Allocated

“As the world’s second-largest economy, and one that still has a lot of growth potential, China is significantly under allocated in global assets,” said Wang Ming, marketing director at Shanghai Yaozhi Asset Management.

“Bonds are a relatively safe choice, and demand will grow as the country further opens its market, perhaps regardless of interest-rate differentials.”

The yield on China’s benchmark 10-year government bonds jumped 98 basis points last year in the biggest yearly advance in ChinaBond data going back to 2007.

While the yield on the sovereign has risen eight basis points this month to 4.52% on March 20, the rate on the riskier AA- corporate notes has advanced 12 basis points to 8.26%.

Bloomberg