Foreign FIs Buy More China Bonds In September

     BEIJING (MNI) - Foreign financial institutions continued to increase their

holdings of government bonds and negotiable certificates of deposit (NCDs) in

September, driven by the high yield gap between China and U.S. bonds, while

asset management funds bought large amounts of government bonds and policy bank

bonds.

     Total outstanding bonds at Shanghai Clearing House and China Government

Securities Depository Trust and Clearing Co., covering all major types of bonds,

increased CNY743.9 billion in September, down from an increase of CNY810.4

billion in August, with a slowdown in the net issuance of NCDs the main reason.

     The net issuance of NCDs in September shrank CNY126.9 billion, compared

with growth of CNY26.2 billion in August.

     "In September, banks planned to issue a total of CNY2.43 trillion in NCDs,

but [only] issued a total of CNY2.2 trillion," China International Capital

Corporation said last week. "However, because of a too-high volume of maturing

NCDs, the net issuance fell in September. The fall in the net issuance of NCDs

was also due to interbank deleveraging and the stricter regulations on NCDs."

     Foreign financial institutions increased their holdings of China bonds in

September by CNY961.0 billion, higher than the CNY825.7 billion growth in August

and representing a historic high since data became publicly available in January

2015. 

     Foreign financial institutions increased holdings of NCDs by CNY50.1

billion in September, lower than the CNY63.8 billion increase in August.

Domestic commercial banks, meanwhile, decreased their holdings of NCDs by

CNY148.3 billion in September, compared with a decrease of CNY72.6 billion in

August, for the fifth consecutive monthly drop.

     Foreign financial institutions also increased their holdings of government

treasuries and policy bank bonds by CNY28.4 and CNY11.8 billion, respectively,

in September, while their purchases of corporate bonds remained insignificant. 

     "The relatively high yield gap between China and U.S. bonds, minimal

risk-aversion sentiments and the two-way fluctuating yuan exchange rate have

improved the attraction of China bonds for foreign financial institutions,"

China Merchant Securities said in a report on Tuesday. "We expect foreign

financial institutions to continue to increase their holdings of China bonds in

the future, and our indicators show the scale of the net increase of their

holdings in October will remain high, like in August and September."

     Meanwhile, commercial banks increased their holdings of government

treasuries and policy bank bonds by CNY74.9 and CNY79.1 billion, respectively,

in September, compared with a CNY54.6 billion increase and CNY77.8 billion

increase in August, while they decreased their holdings of NCDs by CNY148.3

billion in September, compared with a CNY72.6 billion decrease in August.

     Asset management funds increased their holdings of treasuries and policy

bank bonds to CNY55.9 and CNY107.5 billion in September, compared with increases

of CNY78.3 and CNY96.5 billion in August. They sold short-term corporate notes

in the amount of CNY18.0 billion, compared with a net sale of CNY35.2 billion in

August, while increasing their holdings of longer-term corporate bonds by CNY79

billion in September, down from CNY121.9 billion in August.

     Funds increased their holdings of NCDs by CNY85.4 billion in September,

compared with a decrease of CNY873 million in August.

     "It is worth noting that the funds increased their holdings of policy bank

bonds, government bonds and local government bonds by a total of CNY610 billion

in the third quarter, which is a big amount," China International Capital

Corporation said last week. "During June and July, when the money market funds

developed quickly, funds increased their holdings of NCDs in large quantities.

In August and September, their attention shifted from NCDs to policy bank bonds,

government bonds and local government bonds." 

     CICC added that it would pay attention to whether funds continue to

increase their bond holdings because "their behavior will have a big impact on

bonds yields."

     Insurance companies continued to see a decline in their bond positions by

CNY68.4 billion in September, slightly recovering from the CNY103.1 billion

decrease in August. They cut their holdings of policy bank bonds and NCDs by

CNY15.4 billion and CNY29.9 billion, respectively. They also reduced their

holdings of corporate bonds by CNY16.7 billion during the same period. However,

they increased their holdings of government bonds by CNY4.7 billion, bouncing

back from a decrease of CNY50.3 billion in August.

     Securities companies increased their holdings of bonds by CNY30.3 billion

in September, higher than the CNY9.2 billion increase in August. They increased

their purchases of government bonds and medium-term notes by CNY22.9 billion and

CNY16.9 billion, compared with decreases of CNY300 million and 2.7 billion in

August. The main reason they increased their holdings of medium-term bonds was

the higher yields on offer in September, said Han Ping and Qi Sheng, analysts

with Zhongtai Securities.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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