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CORRECTED-Foreign investors buy China bonds for 21st straight month

(Corrects first number in 3rd paragraph)

SHANGHAI, Sept 3 (Reuters) - Foreign investors in August raised their holdings of China bonds for the 21st month in a row, lured by a rising yuan and attractive yield premiums.

Overseas investors in August held a total of 2.46 trillion yuan ($360.45 billion) of China bonds, up 42.8% from the same period last year, according to data from China Central Depository and Clearing Co.

That was an increase of 117.8 billion yuan from July, according to the data. In July, the increase was 148.1 billion yuan, a monthly record high.

According to Reuters calculations, offshore investors raised their holdings of China’s book-entry treasury bonds by 60.9 billion yuan to 1.6 trillion yuan last month.

A firming yuan and favourable yield premiums helped attract foreign investors, said Li Yishuang, chief fixed income analyst at Cinda Securities.

The spread of Chinese 10-year government bonds over their U.S. counterparts was at 245.4 basis points on Thursday, according to Refinitiv data.

The yuan touched a near 16-month peak around 6.81 against the U.S. dollar this week, recovering all the losses suffered during the coronavirus pandemic to stand about 2% stronger for the year so far.

China published draft rules on Wednesday aimed at facilitating foreign access to the world’s second-biggest bond market, potentially fuelling further strength in the yuan.

Even before the draft rules were published, analysts widely expected FTSE Russell to agree to include Chinese bonds in its World Government Bond Index (WGBI) at its annual review later this month.

Standard Chartered predicted an 80% probability that China will be included. Foreign inflows into China’s bond market will reach 800 billion to 1 trillion yuan this year, rising further to 1-1.2 trillion yuan in 2021, the bank forecast. ($1 = 6.8248 Chinese yuan) (Reporting by Luoyan Liu, Li Hongwei and Brenda Goh; Editing by Subhranshu Sahu)

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