1.79 trillion yuan! What makes foreigners buy and buy

China's bond market has become a haven for foreign investors this year as the country's economy has made a rapid and steady recovery while asset yields in major economies have fallen. Foreign holdings of Chinese government bonds have surged to a record 1.79 trillion yuan amid a decline in U.S. Treasury yields, according to data released by the China Bond Information Network.

Another set of data showed that the escrow of overseas agency bonds in November was 2766336 billion yuan, up 47.88 percent year on year. So far, foreign institutional investors have increased their holdings of Chinese bonds for 24 consecutive months. International investors are pouring money into Chinese bonds in a sign of foreign confidence in the long-term health of the Chinese economy.

Chinese bonds are in demand

The yuan's 6.5 percent rise against the dollar this year is among the highest of any emerging-market currency, according to the International Monetary Fund. At the same time, in stark contrast to other major economies, real interest rates on Chinese government bonds are also very high. The premium China pays on 10-year government bonds over TREASURIES over the same period has risen to 250 basis points, the highest level on record.

Against this backdrop, international investors have poured record amounts of money into Chinese bonds this year. The most telling indicator is the behaviour of Japanese investors this year. It is reported that Japan has increased its holdings of Chinese bonds while continuing to sell US treasuries. Japanese funds bought a net 85.6 billion yen (5.3 billion yuan) of Chinese bonds in October and 505.7 billion yen (31.7 billion yuan) in 2020, according to the latest data released by Japan's Ministry of Finance.

, suning financial institute, a senior researcher at cermet in international business newspaper reporter interview analysis, first of all, the acceleration of China's bond market opening to the outside world in recent years, the bond through the QFII (qualified foreign institutional investors), RQFII qualified foreign institutional investors (RMB) directly into the market and investment way on the basis of better meet the needs of foreign investors, and the world's three major bond index will related bonds into China in succession, objectively also triggered global investors more configuration requirements; Second, the performance of China's representative listed companies has been stable during the epidemic prevention and control period, and the growth potential has been gradually released, which has triggered the demand for foreign investment allocation. Third, the interest rate differential is one of the reasons why Chinese bonds and other assets are more attractive. Behind the interest rate differential is China's outstanding performance compared with other countries in terms of anti-epidemic, economic recovery and policy level.

Major market institutions are optimistic that China's economy will continue to lead global economic growth in 2021. In September, FTSE Russell announced the inclusion of Chinese bonds in the FTSE World Government Bond Index (WGBI) from October 2021. Linan Liu, head of macro strategy analysis for Greater China at Deutsche Bank, estimated 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.

Tao believes that China's economic development in a stable and long-term, has the ability to attract foreign investment to share the dividend of stable growth in the long term. In addition, the US dollar will enter a longer depreciation cycle in the future, and correspondingly, the long-term appreciation of RMB is a highly probable event, which can form a positive circular effect with foreign capital inflow.

Promoting the internationalization of RMB

In Tao's view, the demand for Chinese bonds by international investors will help increase the supply of products in the offshore RMB market, enrich the investment channels in overseas markets, expand the scale of the offshore RMB market, and thus contribute to the internationalization of the RMB.

It is not just Chinese bonds that are in demand. So far this year, the global appeal of the renminbi has continued to grow. Data show that in the third quarter of this year, the cross-border use of the RMB for trade in goods continued to expand, with the use of the RMB for settlement exceeding 1.2 trillion yuan, up 14.2% year-on-year.

Liu Ying, a researcher with chongyang Institute for Financial Studies at Renmin University of China, told The International Business Daily that China's economic recovery is much faster than other major economies and the return on assets is relatively high. Meanwhile, the continued appreciation of the yuan and the expectation of appreciation will attract more investors to invest in China. At the same time, the signing of the Regional Comprehensive Economic Partnership (RCEP) will also provide a broader stage for RMB internationalization. "In this context, the renminbi can seek more stable development through opening up the domestic financial sector and seizing opportunities."

The People's Bank of China and six other authorities recently issued the Notice on Further Optimizing the Cross-border RMB Policy to Support Stable Foreign Trade and Stable Foreign Investment (Draft for Comments), to further simplify the cross-border RMB settlement process and provide greater convenience for CROSS-BORDER RMB investment and financing. The central bank recently revealed that the policy document will be released soon.

Tao stressed that although the internationalization of the RMB is expected to accelerate next year, the capital account has not yet been fully liberalized, and there will still be a "ceiling" on the internationalization of the RMB. In the long run, it is necessary to find a balance between promoting the internationalization and preventing the fluctuation of foreign capital.