Foreign FIs Up Holdings Of China Bonds, NCDs On Stronger Yuan

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

holdings of bonds and negotiable certificates of deposit (NCDs) in August as the

yuan gained strength, while domestic banks and asset management funds targeted

policy bank bonds while unloading NCDs due to tightened regulations.

     Total outstanding bonds at Shanghai Clearing House (SCH) and China

Government Securities Depository Trust and Clearing Company (CDC), covering all

major types of bonds, increased CNY810.4 billion in August, down from the

CNY1.49 trillion increase in July, with slowdowns in the issuance of local

government bonds and NCDs dragging down the total.

     The net issuances of local government bonds and NCDs in August were

CNY357.07 billion and CNY26.2 billion, much less than the CNY753.8 billion and

CNY433.1 billion of issuances of each, respectively, in July.

     Foreign financial institutions increased their holdings of NCDs by CNY63.8

billion in August to a total of CNY88.3 billion, leading all types of financial

institutions in net purchases of NCDs in August. Domestic commercial banks,

meanwhile, decreased their holdings of NCDs by CNY72.6 billion to CNY2.86

trillion in August, the fourth consecutive monthly drop. They also reduced their

holdings of corporate bonds by CNY44.6 billion to CNY1.81 trillion in August. 

     Foreign financial institutions also increased their holdings of government

treasuries and policy bank bonds by CNY11.0 and CNY26.6 billion, respectively,

in August, a sign that foreign institutions prefer bonds with lower risks.

     "Domestic bonds yields are very attractive compared with other countries'

bonds yields, especially short-term bonds," China International Capital

Corporation (CICC) said in a report on Tuesday. "Also, the continuing

appreciation of the yuan has changed depreciation expectations, motivating

foreign institutions to increase their purchases of China bonds."

     Meanwhile, commercial banks increased their holdings of government

treasuries and policy bank bonds by CNY54.6 and CNY77.8 billion, respectively,

in August, compared with a CNY149.7 billion increase and CNY57.1 billion

decrease in July.

     "The banks' demands for policy bank bonds recovered significantly in

August," Tang Yue and Zuo Dayong, analysts at Industrial Securities, said at the

weekend. "That was mainly caused by a drop in local government bond issuance,

which releases banks' demands for other types of bonds. On top of that, banks

have issued a lot of loans so far this year, so they began to put more emphasis

on bonds because of loan quota restrictions."

     Asset management funds increased their holding of treasuries and policy

bank bonds to CNY78.3 and CNY96.5 billion in August, compared with increases of

CNY79.2 and CNY36.8 billion in July. They sold short-term corporate notes in the

amount of CNY35.2 billion while increasing their holdings of longer-term

corporate bonds by CNY121.9 billion.

     Funds remained the biggest holder of corporate bonds, at CNY4.82 trillion

as of the end of August, with commercial banks holding CNY 1.57 trillion.

     Funds reduced their holdings of NCDs by CNY873 million in August, in stark

contrast to a CNY429.6 increase in July, due to the influence of tighter

regulations.

     "Recently, some rules came out targeting NCDs -- including prohibiting the

issuance of NCDs with tenors of more than one year, and also including NCDs in

[banks'] macro-prudential assessments beginning next year, as well as

restricting money market funds from investing in low-rated NCDs -- causing more

restrictions on funds to invest in NCDs," Industrial Research said in a report

on Monday. "The August data suggests that funds are adjusting their investment

portfolios to satisfy the requirements of regulators."

     Insurance companies, which increased their holdings of all types of bonds

earlier this year, saw a decline in their bond positions in August. They cut

their holdings of government treasuries and policy bank bonds by CNY50.3 billion

and CNY20.9 billion in August, respectively. They also reduced their holdings of

corporate bonds CNY16.7 billion during the same period.

     "Insurance companies increased their holdings of bonds from January to May

this year, but they stopped doing so in June, and in August they decreased their

holdings on all types of bonds except NCDs, which saw a small increase of CNY5

billion," China International Capital Corporation said on Tuesday. "On the one

hand, the behavior is caused by the slowing down of premiums in the second half

of this year; on the other hand, a drop of corporate bond yields made them less

attractive for insurance companies compared with other assets like non-standard

assets, and especially when some of the bank-negotiated deposits had a yield of

5.0% to 5.5%."

     Securities companies increased their holdings of policy bank bonds and

corporate bonds by CNY5.1 billion and CNY4.5 billion in August, while they

decreased their holdings of government treasuries by CNY303 million.

--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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