(April 17): Overseas funds’ trading of Chinese onshore bonds via Hong Kong hit a record last month, underscoring growing interest in yuan assets amid escalating Middle East tensions.
Monthly turnover on the so-called Northbound Bond Connect reached an unprecedented 1.22 trillion yuan (US$179 billion) in March, while average daily volumes also climbed to an all-time high of 55.6 billion yuan, according to a statement from the Bond Connect Co on Thursday.
Policy financial bonds and Chinese government bonds were the most popular types, accounting for 59% and 24% of the trading volume, respectively.
The spike in turnover points to rising foreign engagement with China’s bond market as global volatility sparked by the Iran war forced investors to reposition portfolios and seek alternatives. The milestones also reflect the growing use of Bond Connect as a key access channel, reinforcing Hong Kong’s role as a gateway to Chinese markets.
The numbers indicate “a pickup in trading activities” after the Lunar New Year holidays in February and suggest that the Iran war spurred trading interest in Chinese bonds, said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. However, they do not necessarily reflect that foreign investors have “a straight buy and hold” strategy when it comes to the securities, he added.
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The drawbacks remain, as China’s benchmark 10-year yield is about 250 basis points below US Treasuries, denting demand among global funds. Foreign investors’ holdings of Chinese onshore debt stood at 3.19 trillion yuan at the end of March after 11 months of declines, accounting for just 1.8% of the total outstanding amount of interbank bonds.
“Given wider US-China rate gaps since March and relatively low yields, we expect relatively muted interests from non-public investors,” said Xiaojia Zhi, economist at Credit Agricole CIB. “There could be some derisk portfolio withdrawal on emerging markets, including China, from global funds in March.”
For now, the market with its low volatility and limited foreign exposure is appealing to investors seeking diversification and stability. Yuan-denominated bonds have outperformed global peers since the war, supported by the nation’s ample liquidity and economic resilience to the energy shock.
See also: MTR raises US$2.4 bil from first public Hong Kong dollar bonds
Launched in 2017, the Northbound Bond Connect acts as one of the official channels for foreign institutions to access Chinese bonds. Other venues include the China Interbank Bond Market (CIBM) channel and Qualified Foreign Institutional Investor (QFII) programme.
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