The publication of the June bond figures by China Central Depository & Clearing Co. took place about a week later than in previous months. Interbank-bond-market figures released by the central bank’s Shanghai head office on Friday were also delayed, as they are typically sent out in the first half of each month. In May, China’s bond-trading platform for foreign investors quietly stopped providing data on its transactions.
Foreign investors still held 2.32 trillion yuan of Chinese debt at the end of June, well above the 221 billion yuan they owned in 2014. The opening up of China’s capital markets and the inclusion of the nation’s debt in more global bond indexes has attracted central banks and global investors eager to tap its higher yields.
“The bulk of the remaining foreign holdings of Chinese fixed-income assets reflects reserve manager, sovereign wealth fund and index tracking demand,” said Lemon Zhang, a strategist at Barclays Plc in Singapore. Looking ahead, large inflows are unlikely as investors aren’t optimistic on duration or China’s currency, while higher global yields provide alternatives, she said.
Demand for Chinese bonds has waned in recent months as US 10-year yields surged above 3%, while similar-maturity yields in China remained stuck in a range of 2.7% to 2.85% due to the People’s Bank of China’s accommodative monetary policy.
There has been a popular belief among institutional investors that China was for bonds and the US was for equities. The logic is that China is a creditor nation with vast reserves, strong growth and low debt/GDP ratios while the US is encumbered with massive debts and seems incapable of correcting the gaping deficit.
The problem with that view is China’s official government debt might be small but it’s a Communist country. Most of the economy expects a bailout when in trouble because the government continues to hold significant ownership interest in most industries. That suggests China’s debt/GDP are radically understated. The only reason investors were willing to buy Chinese bonds is because they offered a higher yield, and the currency was reasonably stable.
Chinese property is the largest single asset class in the world and prices are falling. That implies the Renminbi will have to fall. Either the price of property declines and causes a recession, or the government waded in and prints the requisite quantity of currency. Both imply a weaker currency.
At the same time Treasuries are trending higher again for the first time in two years. Meanwhile Chinese 10-year yields are now at a higher level than Treasuries and could rise further. That’s not a vote of confidence in China.