September 5, 2017 / 11:11 AM / 15 days ago

Rise in foreign holdings of Chinese bonds slows in August

SHANGHAI, Sept 5 (Reuters) - Offshore institutions increased their holdings of Chinese bonds for a sixth straight month in August, but a slower pace of growth despite a sharp rise in the yuan suggests that investors see less of an upside for yields and the country’s currency.

Holdings of Chinese treasury bonds by overseas investors rose 10.99 billion yuan ($1.7 billion) in August to 497.8 billion yuan, according to Reuters’ calculations based on data from the China Central Depository and Clearing Co (CCDC), the official bond clearing house.

Foreign investors increased their holdings of all forms of Chinese bonds cleared by CCDC by 15.9 billion yuan in August, to 857.4 billion yuan, bringing the rise in foreign holdings of Chinese debt for the year to 78.5 billion yuan. Foreign holdings of Chinese debt totalled 778.8 billion yuan at the end of 2016.

In recent months, analysts have pointed to a strengthening yuan and relatively high onshore rates to explain increases in foreign holdings as Chinese money is lured home.

However, the pace of increase in August was the slowest since May, despite a surging yuan and even higher yields.

“(The) yuan has performed very strongly only in recent months, but the depreciation pressure still exists,” said Gary Ng, an economist at Natixis in Hong Kong, in an emailed response to questions.

Adequate supply due to a large increase in government bond issuance in August may help to limit the short-term potential for yield increases, and combined with expectations of possible depreciation, this “may reduce (the) interest of foreign holders, at least in the short run,” he said.

China’s yuan posted its largest-ever monthly gain in August, in percentage terms, since the Chinese currency was taken off a fixed dollar peg in 2005.

Yields on benchmark 10-year Chinese government bonds were at 3.678 percent on Tuesday, up 108 basis points from lows reached in October.

$1 = 6.5484 Chinese yuan Reporting by Andrew Galbraith; Editing by Jacqueline Wong

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