(Bloomberg) -- Global funds sold Chinese sovereign notes at the fast pace on record last month as the appeal of a once-popular swap-based trade fades and a stock market rebound draws more of their attention.
Offshore investors slashed a net 113.2 billion yuan ($15.9 billion) of Chinese government bonds in September, a record monthly cut in official data dating back to 2014, according to Bloomberg calculation based on Chinabond’s figures released Tuesday.
Negotiable certificates of deposit, which are Chinese banks’ short-term instruments with investment flow patterns that are similar to short-term government notes, also registered the first outflow since August 2023, according to data from Shanghai Clearing House.
The outflows reflect spillover effects from investors’ varied responses to a combination of recent factors, such as the Federal Reserve’s pivot to easing and improving Chinese economic data, that have driven the yuan higher.
The yuan’s strengthening versus the dollar for much of September has upended foreign traders’ once-lucrative strategy that entailed profiting from onshore bonds. In such trades when the yuan was weaker, traders would swap dollars for the local currency to buy NCDs or other short-term government notes, which delivered higher returns than US Treasuries. Returns on the strategy have dwindled due to a lower demand for foreign exchange.
“Foreign investment into front-end CNY fixed income products can be opportunistic in nature,” said Frances Cheung, strategist at Oversea-Chinese Banking Corp. “Implied CNY rates were rising during September, narrowing the asset swap pick-up at NCDs. And that helped explain the outflow, which was not a surprise.”
Overseas funds might have also joined a broader group of investors who had cut some debt investments in a rush to stocks on stimulus hopes. China’s benchmark yield jumped from a record low in late September after Chinese authorities announced a stimulus blitz that spurred a breathtaking surge in stocks in a matter of days. The Chinese stock benchmark, the CSI 300 Index, gained about 21% in September.
“For September, it might be clear that it’s a rotation into other China assets or foreign bonds,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence.
Overseas investors mainly bought the largest companies in the CSI 300 Index between Aug. 19 and Sept. 30, according to figures compiled by Bloomberg.
With US rate cuts reducing returns on dollar assets, Chinese companies’ capital inflow in September jumped the most in about two years, according to Chinese government data.
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