May 23 (Reuters) - Overseas funds that invest in Chinese
yuan-denominated bonds saw record weekly outflows last week,
pointing to accelerated selling by foreigners as U.S. bond
yields rise and the yuan weakens.
According to Refinitiv Lipper, overseas mutual funds and
exchange traded funds that invest in bonds denominated in
Chinese yuan saw net sales of $2.3 billion in the week ended May
18, the highest ever weekly outflow.
Foreign investors have sold Chinese-yuan denominated bonds
aggressively in the past three months, bringing down their total
holdings to $558 billion at the end of April, a 2.8% decline
from March.
Ashish Agrawal, head of emerging markets macro strategy in
Asia, estimated about $10 billion in foreign outflows from
Chinese bonds in May.
"Active foreign investors could continue to reduce their
exposure, with duration and FX returns less of a driver as
rising global yields provide other carry alternatives," he said.
However, he doesn't expect this pace to be sustained in the
second half of the year as the bulk of holdings reflect reserve
manager, sovereign wealth fund and index tracking demand.
The iShares China CNY Bond UCITS ETF USD (Acc) saw
net sales worth $553 million in the week to May 18, while
iShares China CNY Govt Bond UCITS ETF USD (Dist) < CGBI.AS> and
HSBC China Government Local Bond Index ZQ fund saw
outflows of $396 million and $266 million respectively.
At the start of the year, China's 10-year government bonds
offered a solid 1.1 percentage point yield premium over U.S.
10-year government bonds. However, that premium has evaporated
in the past few months, thanks to the U.S. Federal Reserve's
aggressive interest rate hikes and its tough stance to combat
soaring inflation.
China's 10-year bonds now yield slightly less than their
U.S. counterparts.
China's yuan has also slumped about 4.5% so far this year
against a high-flying dollar, hit by concerns over slowing
economic growth that have been exacerbated by widespread strict
lockdowns aimed at curbing the spread of COVID-19.
At the end of last week, China cut its 5-year loan prime
rate (LPR) much more than expected in a bid to boost the housing
sector, but kept its 1-year LPR unchanged.
"The intact ... 1-year LPR fixing showed China is still
concerned about the impact of inverted China-US yield
differential and uncertain inflation outlook," OCBC said in a
note on Monday.
"Given the Fed is expected to deliver another 100bps rate
hike in June and July, the outflow (from Chinese bonds) may
continue for a while in line with other emerging markets."
(Reporting By Patturaja Murugaboopathy and Gaurav Dogra in
Bengaluru
Editing by Andrew Galbraith and Mark Potter)