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Chinese bonds are subject to foreign exits directly for the third month in a row

Foreign investors cut Chinese yuan bonds by more than $ 16 billion in April, the third month in a row.

Global investors began to reduce their investments in February amid concerns about the geopolitical risks of investing in Chinese assets and the economic impact of China’s tough approach to Covid-19. China’s sovereign bond yields fell below U.S. Treasury bills for the first time in more than a decade for the first time in a decade, further reducing the former’s appeal.

International holders reduced their positions by a net gain of 108.5 trillion yuan, the equivalent of $ 16.1 billion, according to data from the two clearing houses, China Central Depository & Clearing Co. and according to Shanghai Clearing House data. That was slightly lower than the 112.5 billion yuan in March. Foreign participation is largely, but not entirely, made up of bonds issued by large government-backed Chinese government bonds and known as policy banks.

Among the sellers in April was VP Bank AG, a Liechtenstein-based financial institution. The company first invested in government bonds in China last June, allocating about 2% of its discretionary authority to wealthy customers to the asset class, said VP Bank Investment Director Felix Brill.

Mr Brill said China’s bonds were significantly more attractive to the US Treasury and European Government bonds and that the inclusion of yuan securities in global bond indices at the time was attractive. Following the investment, Chinese government bonds rose in price as yields fell, and some European investors gained 16%, partly due to a significant strengthening of the Chinese currency against the euro.

In early April, VP Bank’s investment committee decided to close its position on Chinese bonds and “lock in profits,” Mr. Brill said. “It was such a good trade … everything went well in the last 10 months,” he said, and as rates rose elsewhere, the company concluded that there were better investment opportunities in other types of bonds.

Over the years, the Chinese government’s debt has offered a huge profit advantage over Treasurys, with that additional profit rising by more than 2.5 percentage points in 2020. But both bond markets have changed position this year as the US Federal Reserve has begun to raise interest rates. The People’s Bank of China has eased its policy to soften the economic impact of a new wave of Covid-19.

As of Tuesday, the 10-year U.S. Treasury yield was up 2.969 percent, 0.15 percentage points higher than its Chinese counterpart, according to FactSet.

Rob Drijkoningen, Neuberger Berman’s senior portfolio manager and head of the emerging market debt group, said China’s large government bond price gains are likely to end by now because China’s central bank is likely to significantly ease monetary policy.

In addition, “yields are unlikely to return soon,” he said, citing the difference between Chinese government bonds and U.S. Treasury yields. He added that the willingness of global investors to invest in Chinese assets has also been affected by Russia’s invasions of Ukraine earlier this year and the political tensions between the US and China.

However, Mr. Drijkoningen said that foreign institutions with a long-term strategic vision for investing in China are likely to continue to put money into Chinese bonds.

The fall in April saw a net reduction of 42 billion yuan, or the equivalent of $ 6.2 billion, in shares of government bonds in China, according to data released by the CCDC on Tuesday. Foreigners also threw $ 6 billion in banknotes issued by political banks, data show.

The total value of foreign shares fell to 3.768 trillion yuan, or about $ 559 billion. That has been the lowest reading since last July.

Flows in and out of Chinese stocks have been less consistent. Global investors bought a net 6.3 billion yuan, or the equivalent of $ 935 billion, the equivalent of Chinese domestic stocks through the Stock Connect trade link in April, after a net sale of about $ 7 billion in March, Wind data show.

As of Tuesday, global investors had thrown in the equivalent of $ 1.7 billion worth of Chinese shares this month.

Write Rebecca Feng at rebecca.feng@wsj.com and Serena Ng at serena.ng@wsj.com

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Chinese bonds are subject to foreign exits directly for the third month in a row

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