SHANGHAI: Foreign investors resumed cutting their holdings of China's onshore bonds in January following a rare increase a month earlier, official data showed over the weekend, as improved risk appetite drew cash into equities and pressured debt markets.
Foreign holdings of yuan-denominated bonds traded on China's interbank market stood at 3.28 trillion yuan ($477.7 billion) at end-January, down from 3.39 trillion yuan at the end of last year, the central bank's Shanghai head office said.
Prior to the rise recorded in December, overseas institutional investor outflows had run for a record 10 straight months, the longest streak on record. And foreigners sold a total of 610 billion yuan worth of Chinese interbank bonds in 2022.
A buoyant dollar in light of the US Federal Reserve's aggressive interest rate hikes, yuan weakness and COVID-induced disruptions in China were among the major factors discouraging foreign capital last year.
Beijing's abrupt exit from its stringent zero-COVID strategy in December and its shift to a pro-growth policy stance have raised market hopes for a strong economic recovery this year.
China's stock market enjoyed the reopening-driven rally, with foreign investors snapping up record Chinese equities worth $27.7 billion last month, the highest monthly inflow on record, according to the country's FX regulator.
Global investors have been reducing their holdings of Chinese government bonds, a source of secure returns during the pandemic years, as they seek juicier returns from stock markets in the reopened economy.
Cosmo Zhang, credit analyst at Vontobel, said he does not expect the foreign capital inflows into the Chinese onshore sovereign or quasi-sovereign yuan bond markets to be as huge as two or three years ago, as the Fed's monetary tightening has effectively made yields on Chinese bonds less attractive.
"Additionally, China's exports this year are not promising and current account surplus will shrink. These all put downward pressure on yuan exchange rate against the dollar," Zhang said.
