Why are RMB bonds so popular
Zhou Lin
According to data released by the China National Debt Depository and Clearing Co., Ltd., by the end of July this year, overseas institutions have increased their holdings of RMB bonds for 32 consecutive months, and the enthusiasm of overseas investment institutions for RMB bonds has continued unabated.
China's financial system is relatively healthy as a whole, and valuation bubbles are relatively small compared to overseas markets. It is no accident that RMB bonds are favored by overseas investment institutions.
According to data released by the China National Debt Depository and Clearing Co., Ltd., as of the end of July this year, the amount of RMB bond custody held by overseas institutions reached 3,375,187 million yuan, a record high in the past five months. By the end of July this year, there were 32 overseas institutions in a row. By increasing their holdings of renminbi bonds monthly, overseas investment institutions' enthusiasm for renminbi bonds has continued unabated.
Following the net increase of foreign institutions' holdings of Chinese bonds by more than 1 trillion yuan in 2020, RMB bonds still remain so popular for several reasons.
From a fundamental point of view, the continuous increase in sovereign bond holdings by overseas funds is one of the signs that a country's comprehensive national strength is recognized.
In the first half of the year, my country’s gross domestic product increased by 12.7% year-on-year. The results of the overall planning of epidemic prevention and control and economic and social development have been continuously expanded and consolidated. Economic operations have continued to recover steadily. Start steadily.
The continuous increase in the holdings of RMB bonds by foreign investors fully demonstrates that foreign capital has maintained long-term confidence in China's economic and social development.
From the perspective of asset allocation, RMB assets are currently cost-effective and have become a "safe haven" for foreign capital. The global asset allocation demand is higher than that of other emerging economies.
Among them, renminbi bonds have relatively good investment returns. For example, the yield of 10-year treasury bonds is stable, which is significantly higher than that of bonds in countries that implement zero or even negative interest rates.
Since 2020, foreign purchases of domestic bonds accounted for about half of the increase in full-scale foreign debt. This is mainly because the proportion and influence of China’s economy in the global economy has further increased, and the investment value and investment opportunities of China’s financial assets have been generally recognized by international capital. "Increase allocation to China" is one of the common strategies of foreign capital.
From the perspective of environmental factors, financial opening has created more convenient conditions for international investors to choose RMB bonds.
The opening of my country's capital market began with the introduction of the Qualified Foreign Institutional Investor (QFII) system in 2002. In 2016, the opening of the bond market accelerated significantly.
With the launch of the Hong Kong and Mainland bond market interconnection mechanism (ie Bond Connect) in July 2017, the opening of the bond market to the outside world has accelerated.
In July this year, 26 new foreign institutional investors entered the market through Bond Connect. Currently, Bond Connect has brought together 2,673 foreign institutional investors from 34 countries and regions around the world.
From the perspective of foreign capital, with the FTSE Russell World Treasury Index, Bloomberg Barclays Global Aggregate Index, and JPMorgan Chase Global Emerging Market Government Bond Index and other global mainstream bond indexes, the Chinese bond market has been included, increased weight, and foreign investment has allocated momentum. With continuous enhancement, the channels for foreign investors to participate in the Chinese bond market have continued to increase.
Relevant departments have recently stated that they will explore the free inflow and outflow and free convertibility of capital in the Shanghai Lingang New Area to further accelerate capital account opening and RMB internationalization.
From the perspective of the bond market's own factors, the current bubble risk in my country's bond market is relatively small, and the bond issuance and trading markets are stable.
In response to the impact of adverse external factors, major global economies have implemented large-scale fiscal and monetary stimulus policies, while China has insisted on implementing normal economic policies. RMB government bonds and policy financial bonds have maintained positive returns, making up for the lack of global security assets.
China's financial system is relatively healthy as a whole, and valuation bubbles are relatively small compared to overseas markets. This has also become an important reason for attracting foreign capital to allocate more renminbi bonds.
From the perspective of investment laws, in the global low interest rate environment, the interest rate level of China's bond market is relatively higher, and the RMB exchange rate has a long-term appreciation trend.
Compared with the bond market yield levels of zero or negative interest rates in some economies, the spreads in the Chinese and foreign bond markets are relatively considerable, and the comparative advantage of investment returns in the Chinese bond market is obvious.
From a long-term perspective, the dual benefits of "high interest spreads + exchange rate appreciation" in the Chinese bond market have made overseas investors fascinated.
In summary, whether it is from the perspective of economic fundamentals and financial opening, or from the perspective of the bond market itself and investment laws, it is no accident that RMB bonds are favored by overseas investment institutions.
With economic development and opening to the outside world, the Chinese bond market will attract more external investors to share the dividends.
In this process, normal cross-border capital flows should be happy to see results, but financial security strategies must be implemented to prevent the risk of large inflows and outflows of hot money.
Zhou Lin
Zhou Lin