HONG KONG, May 28 (Reuters) - Foreign investors have started to allocate more funds to Chinese bonds, locking in profits from a huge stock rally in China and seeking less risky channels to park their funds.
Bond exchange-traded funds (ETF) managed by fund managers under the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme have seen strong inflows since April, industry data showed.
China CSOP Asset Management, which is the biggest RQFII player and which manages an ETF that targets China's five-year treasury bond recorded inflows of 1.68 billion yuan ($270.80 million) last month, the highest monthly inflow since the fund's launch in February, 2014.
By contrast, the firm's FTSE China A50 ETF had outflows of about 11 billion yuan during the same period, according to Morningstar data.
"We've seen big inflows into our fixed-income products from European and U.S. investors recently who switched out of equity products to wait for a meaningful correction of 15-20 percent," said Jack Wang, head of institutional clients at CSOP Asset Management.
As China's A-shares are yet to be included in major global benchmarks, investors tend to take profits when they rally too much in a short period, Wang said.
The Shanghai Composite Index has surged to around seven-year highs and has outperformed all its peers globally so far this year with a more than 50 percent rise.
A-shares, which are Chinese companies listed in Shanghai and Shenzhen, have an average premium of 30 percent over H-shares, which are Hong Kong-listed companies incorporated in mainland China.
"U.S. investors are increasing their allocations to Chinese bonds. We have a bond ETF listed in the U.S., which saw its size swelling to $50 million from $10 million in the past month or so," said David Zhang, deputy CEO of E Fund (Hong Kong).
Supporting demand for bonds is a growing consensus that China is getting deeper into a policy easing cycle after five interest rates and reserve requirement ratio (RRR) cuts in six months, continually pumping funds into the market.
More easing is expected in coming months as the economy looks set for its worst year in 25 years.
In addition, the yuan has grown more stable since late March, giving investors confidence that are unlikely to suffer big foreign exchange losses, especially in the run-up to discussions on whether the yuan will be included in the International Monetary Fund's SDR basket.
"Global investors are heavily underweight Chinese assets at present. But as the yuan is on its way to become a reserve currency, it is driving diversification needs from global investors," said Becky Liu, a senior strategist at Standard Chartered.
Demand for Chinese bonds is likely to remain strong as they yield more than their peers in other major markets, and a weak primary offshore yuan bond market also means demand for onshore bonds via various schemes like RQFII will continue, analysts say.
China's five-year treasury bond, for example, yields 3.2 percent, compared to 1.5 percent for its U.S. counterpart.
Gross offshore yuan bond issuance in the first four months was a sluggish 151 billion yuan, down 46 percent from a year earlier. Year-to-date net issuance was negative as more bonds have matured than new ones issued.
$1 = 6.2038 Chinese yuan Reporting by Michelle Chen; Editing by Kim Coghill