Stay Informed with Free Updates: The Chinese Business & Finance MyFT Digest

Foreign investors have been making significant moves in the Chinese bond market. Over the past two months, they have dumped Chinese government bonds, unwinding a lucrative trade that was previously enabled by Beijing's currency support efforts. Investors had poured over $130bn between November last year and August into a trading strategy involving lending dollars and buying Chinese bonds. The return on this strategy could reach up to 6%, significantly higher than the yield on a US Treasury bond. However, the announcement of a bumper stimulus package in September led to a sell-off in Chinese government bonds and a rebound in the renminbi, causing losses for those who had piled into the trade. According to data from China Central Depository & Clearing and the Shanghai Clearing House, foreign investors sold a net Rmb275.8bn ($38bn) of Chinese debt in September and October, with the majority being government bonds. This total includes a reduction of Rmb62.8bn in holdings of interbank negotiable certificates of deposit (NCDs), which many investors in this strategy tend to buy. These sales marked the largest monthly outflows of NCDs on record.Some content could not load due to internet or browser issues.Market movements have made the cross-currency swap rates less attractive for foreign investors to buy NCDs. The yield from this trade has shrunk in recent months. Chinese state banks benefited from the trade as the currency swaps helped stabilize the renminbi's exchange rate. But Beijing's stimulus measures in September, including monetary support for stock markets and debt swaps for local governments, drove a 0.17% surge in 10-year Chinese government bond yields in just three days.Greater volatility in bond prices, caused by central bank intervention since August and increased Ministry of Finance issuance, has made the bonds less appealing to foreign investors. Meanwhile, US Treasury yields are higher due to a sell-off in recent months as investors bet on a Trump victory in the US presidential election making interest rate cuts less likely. This makes US Treasury bonds a relatively more attractive option for investors to park their cash.As a result of a weakening renminbi due to a strong dollar and potential US tariff increases, longer-term demand from foreign investors for Chinese government bonds "could remain relatively light". Instead, foreign investors with risk appetite may enter Chinese equities.

Key Insights and Implications

The dumping of Chinese government bonds by foreign investors highlights the changing dynamics in the global financial markets. The previous popular trading strategy that offered high returns is now facing challenges due to various factors such as Beijing's stimulus measures and market volatility. This has significant implications for both Chinese and foreign investors. Chinese state banks, which had benefited from the currency swap trade, now need to adapt to the new market conditions. Foreign investors, on the other hand, are reevaluating their investment strategies and looking for alternative investment opportunities. The weakening renminbi and the potential increase in US tariffs add to the uncertainty and make it crucial for investors to carefully assess their positions. The impact of these market movements extends beyond the bond market and can have ripple effects on other sectors such as equities and the overall economy. It remains to be seen how these trends will unfold in the coming months and what measures will be taken by relevant authorities to stabilize the markets.In conclusion, the recent events in the Chinese business and finance sector have presented both challenges and opportunities. Investors need to stay informed and adapt to the changing landscape to make informed investment decisions.