May 7, 2019 / 8:12 AM / in 13 days

Foreign investors raise China bond holdings as index inclusion begins

SHANGHAI, May 7 (Reuters) - Offshore holdings of Chinese treasury bonds touched a new high in April as some Chinese bonds began to be included in a major global index.

April marked the first of a 20-month inclusion process of Chinese government and policy bank bonds in the Bloomberg Barclays Global Aggregate Index. With a 6 percent weighting in the index, some observers expect the move could draw $150 billion into Chinese fixed income.

Holdings of Chinese central government bonds by foreign investors totalled 1.11 trillion yuan ($163.74 billion) at the end of April, a 19.04 billion yuan increase over the previous month’s record, according to Reuters’ calculations of data from China Central Depository and Clearing Co (CCDC), China’s main bond clearing house.

Foreign investors’ total Chinese yuan bond holdings in the interbank market reached 1.53 trillion yuan by the end of April, also a record high, and an increase of 18.7 billion yuan from a month earlier.

Bonds issued by China’s policy banks, which help to finance government initiatives, comprised 369.08 billion yuan of total foreign holdings at the end of April, down from a peak of 379.65 billion at the end of February.

Policy bank bonds are highly liquid: The 10 most-traded bonds in China’s interbank market in April were all issued by either China Development Bank or the Agricultural Development Bank of China, according to China’s National Interbank Funding Center.

They have also become more attractive to foreign investors following the introduction of a three-year tax waiver in November.

The first month of bond inclusion in the Bloomberg Barclays index was marked by a sharp rise in Chinese bond yields as signs of a stabilising economy forced investors to reconsider expectations for further policy easing.

The yield on 10-year Chinese government bonds rose 34 basis points over the month of April, and stood at 3.365 percent on Tuesday, Refinitiv data showed.

April data from Shanghai Clearing House, which provides additional information on foreign bond holdings, was not yet available on Tuesday.

$1 = 6.7790 Chinese yuan Reporting by Andrew Galbraith Editing by Jacqueline Wong

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