Foreigners sink deeper into China with record local debt spree

(Bloomberg) – Foreign funds pushed deeper into the Chinese bond market in June, making their biggest purchases of municipal debt.

Foreign investors added 730 million yuan ($ 113 million) in local government notes, according to figures from ChinaBond. While this is small compared to the 13.4 billion yuan of sovereign debt they bought, it is still a record gain based on data compiled by Bloomberg going back to 2018. The move also coincides with a further slowdown in sovereign bond purchases.

Growing global interest in China’s municipal debt is a testament to the continued opening up of the country’s bond market, which began just five years ago. The success and popularity of Chinese debt is helping to pave the way for further integration into the international financial system. Beijing is expected to launch a bond trading channel that will allow domestic traders to invest abroad as early as this month.

“The amount of local government bonds bought by foreigners is still very small, but it shows a good sign of diversification compared to only Chinese government bonds,” said Becky Liu, head of macro strategy for China at Standard Chartered Plc in Hong Kong. Foreign investors are likely to shift some of their holdings of long-term Chinese bonds into municipal debt for the recovery of yields, she said.

This riskier but more lucrative sector is still largely an arena for domestic commercial banks. The growing foreign interest comes as the yield premium between China’s 10-year benchmark sovereign bonds and like-grade US peers has narrowed this year. At the same time, local authorities have also stepped up the pace of emissions after an unexpected slowdown at the start of the year.

ChinaBond’s data covers the majority of the country’s interbank market, where most government and political banknotes are traded. Other figures will likely be released by the Shanghai clearinghouse, which will cover certain credit obligations in the interbank and foreign exchange markets.

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