China Bonds See Rising Foreign Investment

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  • July 21, 2025

The enthusiasm of international investors towards China's bond market is witnessing unwavering growth, reflecting a strong desire to tap into opportunities within one of the world's most promising financial landscapesRecent data released by the State Administration of Foreign Exchange (SAFE) reveals that foreign investments in RMB-denominated bonds surged significantly in the first half of 2024, with net purchases of domestic bonds by foreign investors nearing a staggering $80 billionThis figure stands as the second-highest value recorded during this period in historyCompounding this upward trend, data from the People's Bank of China (PBOC) Shanghai headquarters indicates that foreign investors have been increasing their holdings of Chinese bonds for a remarkable ten consecutive monthsThis long-standing commitment speaks volumes about the growing confidence foreign investors have in the stability and attractiveness of the Chinese bond market.

As of the end of June 2024, foreign investors held a record-high amount of bonds in the interbank market, amounting to an astounding 43.1 trillion RMBThe accessibility and allure of the Chinese bond market have also witnessed an influx of new participants, with seven additional foreign institutional entities entering the interbank bond market just in JuneBy the end of the month, a total of 1,133 foreign institutional investors had made their foray into this marketThis growing cohort consists of 567 entities that have invested directly and 823 that took advantage of the "Bond Connect" program, with 257 entities utilizing both routes.

When strategizing their investments in RMB bonds, foreign investors are increasingly demonstrating a shift in preferences towards certain types of securitiesAccording to Yu Lifeng, a senior analyst at Orient Securities, the most favored types of bonds among foreign buyers include negotiable certificates of deposit (NCDs), policy bank bonds, and government bondsGiven the current currency exchange dynamics aiming to lock in gains from the foreign exchange market, it is evident that the comprehensive returns from RMB bonds are outpacing those from U.S

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Treasury bonds.

“Calculating based on the USD to RMB exchange rate and one-year swap points as of the end of June, foreign capital buying one-year Chinese government bonds while simultaneously entering into a one-year forward contract is enjoying a total yield of 5.85%. This is significantly higher than the yield of 4.36% offered by one-year U.STreasury bonds,” Yu commentedThe attractiveness of such arbitrage opportunities has led to a marked surge in short-term NCD investments, surpassing 600 billion RMB – a figure that has overtaken increases in holdings for both government and policy bank bonds combinedThe remarkable certainty surrounding these short-term instruments adds to their appeal for foreign investors.

Additionally, a notable factor contributing to the increasing interest from international institutions in RMB bonds is the asset's hedging capabilitiesJiang Huifen, deputy director of the Financial Market Department at the PBOC, highlighted that RMB bonds possess a significant investment diversification value, with their hedging function continually strengtheningNotably, the yield correlation of these bonds with those from G7 nations and other emerging economies remains relatively low, making them an appealing option for risk-averse investors.

Looking ahead, Yu anticipates that RMB bonds remain in the nascent phase of their foreign capital influx journey, with current holdings predominantly concentrated in state bonds, policy bank bonds, and NCDsHowever, as the infrastructure supporting China's domestic credit bond market undergoes further enhancement, it is expected that the type and scale of bonds held by foreign investors will continue to diversify and expand.

Moreover, data from SAFE illustrates that the continued improvement in China's foreign trade is contributing to this bond market enthusiasmThe value of merchandise trade has remained high, leading to a pronounced net inflow of funds across borders during the first half of the year, a condition that ranks among the historical norms

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