March 4, 2020 / 9:47 AM / a month ago

UPDATE 1-Foreign holdings of Chinese bonds hit record, boosted by index entry, sliding yields

* Foreign investors own record amount of government bonds

* China “attractive” as global yields slump - investors

* JPMorgan, Bloomberg Barclays indices add Chinese bonds (Adds investors’ comments, graphics, bullets; recasts throughout)

By Noah Sin and Andrew Galbraith

HONG KONG/SHANGHAI, March 4 (Reuters) - Foreign ownership of yuan-denominated Chinese government bonds rose to a record high in February as interest rates fell faster globally than in China and as benchmark indexes incorporated more of the market.

International investors owned a record 1.34 trillion yuan ($193.35 billion) of government bonds at the end of February, according to Reuters calculation of China Central Depository and Clearing Co (CCDC) data released on Tuesday. Up 2.3% from January, it was the biggest monthly gain in 12 straight months of increases.

Kheng Siang Ng, Asia Pacific head of fixed income at State Street Global Advisors, attributed the jump in foreign ownership to a slump in interest rates worldwide.

“Yields are very low everywhere else, they are negative in Japan, Germany,” he said. “The interest rate (in China) is quite an attractive proposition to investors in Europe, North Asia.”

Chinese bond yields also slid as Beijing took steps to ease financial strains on companies hurt by the coronavirus outbreak, cutting a key interest rate. China’s 10-year government bond yield hit a fresh 3-year low of 2.75% on Monday.

But yields fell faster elsewhere. U.S. 10-year Treasury yields dived below 1% for the first time as the Federal Reserve made an emergency 50 basis points interest rate cut on Tuesday.

The difference between the two benchmarks is now at its widest since 2015, according to Refinitiv Datastream. Market players say that could continue to support interest in Chinese bonds as global investors seek higher returns.

“The economic recovery is likely to be gradual, more hockey stick-shaped than V-shaped. This means that China’s bond yields will stay low and anchored for a while,” said Wilfred Wee, portfolio manager at Investec Asset Management.

“We have been long China bonds since the start of the year due to attractive valuations, and remain so,” he added.

Foreign flows into China’s bond market have also been supported by the 20-month phased inclusion of Chinese government and policy bank bonds in the Bloomberg Barclays Global Aggregate Index, which began last April.

On Feb. 28, JPMorgan started adding Chinese government bonds in its Government Bond Index Emerging Markets (GBI-EM) series over 10 months. China is also on the watchlist to join FTSE Russell’s World Government Bond Index in March.

Offshore ownership of policy bank bonds also hit a record at 536.41 billion yuan in February, according to CCDC data, up 6.8% from January, marking the biggest rise since July 2019.

In total, as of Feb. 29, offshore investors held 1.95 trillion yuan worth of Chinese bonds cleared by CCDC, the larger of China’s bond market clearing houses.

Additional holdings data from Shanghai Clearing House was not yet available on Wednesday. Bonds cleared there have accounted for about 15% of total foreign holdings in recent months. It does not clear government or policy bank bonds.

($1 = 6.9304 Chinese yuan)

Editing by Simon Cameron-Moore

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