For the second year in a row, foreign investors have been buying and buying Chinese bonds

Overseas institutions have increased their allocation of RMB assets (especially government bonds) for two consecutive years, mainly driven by four factors:

1. In the context of low global interest rates, Chinese government bonds have relatively high yields, low risks and investment value.

2. The fundamentals of the Chinese economy are sound, the epidemic prevention and control has been effective, the balance of payments has been improving, the expectation of RMB appreciation has been pushed forward, and RMB assets have become more attractive.

3. The inclusion of RMB bonds in international indexes encourages foreign institutional investors to increase their holdings of RMB bonds.

China has opened its financial market wider and deepened reform of its bond market to create more convenient conditions for overseas institutions to enter the market.

Thanks to high interest rate differentials, the inclusion of Chinese government bonds in international indexes and a series of measures to open the bond market to the outside world, foreign investors increased their holdings of Chinese bonds for two consecutive years. Analysts believe that the momentum of foreign investment in renminbi bonds will continue next year.

Foreign institutions held 3.1 trillion yuan in interbank bonds at the end of November, up 96.721 billion yuan from the end of October and accounting for 3.1 percent of the total amount under custody in the interbank bond market, data from the central bank's Shanghai headquarters showed yesterday. From the perspective of bond certificates, the main trust certificates of overseas institutions are bonds, with the trust volume of 1.79 trillion yuan, accounting for 57.9%. The second is policy-based financial debt, with custody amount of 897.999 billion yuan, accounting for 29.0%.

The latest data from the China Clearing Corporation showed that as of the end of November, the amount of bonds held in custody by foreign institutions in the interbank bond market was 2,766.336 billion yuan, up 83.66 billion yuan from the end of October, marking the 24th consecutive month that foreign institutional investors increased their holdings of Chinese bonds.

At the same time, the deepening of the bond market reform, foreign investment into the market more and more active. Central bank data showed 17 more foreign institutions entered the interbank bond market in November. By the end of November, a total of 893 foreign institutions had entered the market, of which 467 had entered the market through direct investment channels, 612 through "bond connect" channels, and 186 had entered the market through two channels simultaneously.

Foreign trade sentiment remains buoyant. In November, foreign institutions traded 875.4 billion yuan of cash in the interbank bond market, with an average daily trading volume of 39.8 billion yuan. Of this amount, 499.13 billion yuan of bonds were purchased and 376.27 billion yuan of bonds were sold, representing a net purchase of 122.86 billion yuan.

November bond operation report also reflected foreign capital on China's bond market firmly optimistic. Bond trading was active in November, with a total turnover of 485 billion yuan, a record high in a single month, according to data released by the company. At the same time, Bondcom welcomed its first South African investor and expanded its service scope to 34 countries and regions. In addition, more than 60 clients completed their first bond exchange since entering the market in November.

According to Linan Liu, head of macro strategy analysis for Greater China at Deutsche Bank, there are four main drivers for foreign institutions to increase their allocation of yuan assets, especially government bonds, for two consecutive years. First, in the context of low global interest rates, Chinese government bonds offer relatively high yields, low risks and good investment value. Second, the fundamentals of the Chinese economy are sound, the epidemic prevention and control has been effective, the balance of payments has been improving, the expectation of RMB appreciation has been pushed forward, and RMB assets have become more attractive. Third, the inclusion of RMB bonds in international indexes encourages foreign institutional investors to increase their holdings of RMB bonds. Fourth, China is opening its financial market wider and deepening reform of its bond market to create more convenient conditions for overseas institutions to enter the market.

Mr Liu judged that these factors would continue to attract inflows. She predicted that foreign institutions will continue to increase their investment in RMB bonds in 2021, and the total amount of capital flowing into the bond market for the whole year will reach 1.2 trillion yuan.