On July 22, the latest bond custody data released by the Central Clearing Company showed that as of the end of June this year, the denomination of RMB bonds held by overseas institutions was 3,289.027 billion yuan, a decrease of 95.042 billion yuan from the previous month.
Comparatively speaking, the amount of RMB bonds reduced by overseas capital in June was almost the same as that in the past three months, and it was not further expanded due to the deepening spread between China and the United States and the low RMB exchange rate.
"The market generally expects that with the recent introduction of a series of measures to improve the convenience of overseas capital investing in bonds in China and the return of China's economy to a stable growth track, global capital will begin to return to the RMB bond market." A foreign exchange trader of a bank in Hong Kong pointed out to the reporter of 2 1 Century Business Herald.
However, as the Federal Reserve continued to raise interest rates substantially in the second half of the year, the spread between China and the United States has widened. How to curb the continuous reduction of RMB bonds by overseas capital is a major challenge for relevant departments.
"In particular, the reduction of RMB bonds by overseas capital is increasingly closely related to speculative shorting of the RMB exchange rate." The above foreign exchange traders pointed out. The reason is that since the beginning of this year, many overseas speculative capitals have linked the reduction of RMB bonds to capital outflows, speculating on the rapid depreciation of the RMB exchange rate, and achieving the purpose of shorting the RMB exchange rate for profit.
"The rapid depreciation of the RMB exchange rate from April to May was largely due to the reduction of RMB bonds by global capital in February and March, and speculative capital took the opportunity to speculate on capital outflows and the rapid depreciation of the RMB." The above foreign exchange traders are outspoken.
It is worth noting that the relevant departments in China are actively taking targeted measures to curb this speculative short selling.
In late April, Wang Chunying, deputy director of the State Administration of Foreign Exchange, said that the staged adjustment of China's cross-border securities investment in February and March was a natural reaction of the market under the complicated international economic and financial situation, but it did not change the overall balance of China's cross-border capital flows. In the first quarter of this year, cross-border funds under domestic current account and direct investment maintained a surplus, supporting China to maintain a basic balance between cross-border revenue and expenditure and domestic foreign exchange supply and demand.
"The short-term fluctuation of cross-border securities investment does not represent the overall pattern of foreign capital flows, let alone the long-term investment willingness of foreign capital. With the digestion and expected release of some short-term factors in the market, the investment of overseas institutions in CITIC Construction Investment will return to a stable level, and long-term value investment is still the main consideration. " She stressed.
Since then, the relevant departments have successively introduced a number of measures to simplify foreign investors' investment in the China market, including enriching the types of investable assets.
Xia Chun, chief economist of Yin Ke Holdings, told the reporter that at present, overseas investment institutions no longer regard the spread between China and the United States as the main basis for investing in RMB bonds. They realized that even if the Federal Reserve sharply raised the benchmark interest rate to 3.5%-4% at the end of the year and the yield of 10-year US bonds hit 4%, if the inflation rate in the United States remained above 6%, the real rate of return (nominal rate of return inflation) on investing in US bonds would be -2%. Comparatively speaking, although the yield of China 10 bonds hovers around 2.8%, the actual investment yield of China bonds is 0.8%, which is still higher than that of the United States.
Xia Chun believes that there are two major boosting factors for overseas capital to return to the RMB bond market in the second half of the year: First, China's economy has returned to a stable growth track, and China's national debt has more investment security; Second, the proportion of RMB bonds allocated by global investment institutions is still low, and there is huge room for structural Masukura in the future.
Who is reducing its holdings of RMB bonds?
"Frankly speaking, we underestimated the impact of the upside-down spread between China and the United States on the global capital reduction of RMB bonds." The head of the asset allocation department of a large wall street asset management institution revealed to reporters.
At the beginning of this year, although the market generally expected that the differences in monetary policies between China and the United States would lead to the continuous narrowing or even upside down of the spread between China and the United States, at that time, most overseas asset management institutions believed that this move would not lead to a significant reduction of RMB bonds by global capital.
In February, overseas capital reduced its holdings of bonds by 35,654,380+billion yuan through bond channels, but the financial market didn't care at first, because China's foreign trade continued its high boom at that time, and the RMB exchange rate reached a peak of 6.3 during the year, and investment institutions still expected the RMB exchange rate to remain firm.
"Even many investment institutions think that the outflow of overseas funds in February-March is normal, because the risk appetite of asset management institutions in Europe and the United States plummeted at that time, and a large amount of funds were transferred from emerging markets to Europe and the United States to avoid risks." Analysis of the person in charge of the asset allocation department of the above-mentioned asset management institutions.
In his view, there are two fundamental reasons for overseas capital to reduce its holdings of RMB bonds: First, China suffered an epidemic in March, which led to a decline in foreign trade prosperity, the RMB exchange rate continued to fall, and RMB bonds lost the pursuit of arbitrage capital; Second, in March, the Federal Reserve pulled the trigger for raising interest rates, and the spread between China and the United States continued to deepen, forcing some overseas unincorporated wealth management products to withdraw from RMB bonds in stages.
In the past three months, overseas unincorporated wealth management products and arbitrage capital were the main forces to reduce the holdings of RMB bonds. They are most sensitive to the decline of RMB exchange rate and the upside-down spread between China and the United States, especially when the exchange income and risk-free spread of investing in RMB bonds are both adjusted back, these overseas capitals will quickly reduce their holdings and leave. In contrast, overseas central banks and sovereign wealth funds have not shown obvious reduction actions.
Wang Chunying said in late April that the adjustment of cross-border capital flow of securities investment projects is a natural reaction of the market under the complicated international economic and financial situation. With the digestion of some short-term factors and the release of market expectations, the investment of overseas institutions in CITIC Construction Investment will return to a stable state, and long-term value investment is still the main consideration. During the late March, the net outflow of foreign capital under bonds decreased by 39% compared with that in the middle of the month, and it eased further since April, and capital inflows resumed in some trading days.
However, this natural reaction has been used by some overseas speculative capital, which has become an important speculation theme of the expansion of capital outflow pressure and the rapid depreciation of RMB exchange rate.
According to Tonglian data, from mid-April to mid-May, the RMB exchange rate once fell rapidly from 6.36 to 6.8 1, with a cumulative decline of about 4,500 basis points.
"This has created a vicious circle, leading to the continuous reduction of RMB bonds by overseas capital in May and June." The above foreign exchange traders pointed out. Specifically, the rapid decline of RMB exchange rate has caused overseas investment institutions to convert RMB bond assets into dollar-denominated assets, resulting in a significant reduction in the amount, so they have to continue to cut RMB bonds for hedging. But this move has left more room for the speculation of overseas speculative capital.
"Although the scale of overseas capital's reduction of RMB bonds in the past five months is not enough to affect the balance of cross-border capital flows in China, if the relevant departments cannot curb the short-selling strategy of speculative capital, the global allocation attractiveness of Chinese bonds will be weakened." The above foreign exchange traders pointed out.
Rebuilding the confidence of overseas capital investment
In order to boost overseas capital's investment confidence in RMB bonds and curb the new speculative shorting of RMB exchange rate, relevant departments quickly prescribed the right medicine.
At the end of May, the central bank, together with the CSRC and the SAFE, issued the Relevant Matters on Further Facilitating Foreign Institutional Investors to Invest in the China Bond Market, which will take effect on June 30th.
On July 4th, Bank of China, Hong Kong Securities Regulatory Commission and Hong Kong Monetary Authority issued a joint announcement to develop the interconnection and cooperation between Hong Kong and the mainland interest rate swap market, and guide domestic and foreign investors to participate in the investment of domestic interest rate swap products through the connection of financial market infrastructure between Hong Kong and the mainland, thus effectively meeting the interest rate risk management requirements of foreign investors.
In the eyes of many people in the industry, the former mainly aims at the relatively low allocation of RMB bonds by overseas capital, and attracts overseas institutions to speed up the allocation by further simplifying the procedures for investing in domestic RMB bonds; The latter greatly resolved the interest rate risk and interest rate loss caused by the inversion of interest rate spread between China and the United States.
A large macroeconomic hedge fund manager on Wall Street told reporters that after the release of these new measures, they are reassessing the allocation value of RMB bonds.
"During the period from February to May, in the absence of interest rate swap derivatives to hedge the risk of interest rate spread inversion between China and the United States, we can only choose to reduce some RMB bonds to hedge. In the future, if we can solve the problem of interest rate risk and spread loss by purchasing interest rate swap derivatives, we can adopt the strategy of long-term holding and interest rate risk hedging to lock in a stable return on investment. " The above hedge fund manager pointed out.
He also said that despite the phased withdrawal of overseas capital in the first half of the year, most asset management institutions are still optimistic about the allocation potential of RMB bonds. First, the linkage between China's bonds and the global financial market is low, and it has certain safe-haven asset attributes; Second, compared with other emerging market countries facing high inflation, expanding foreign trade deficit, shrinking foreign exchange reserves and increasing economic recession pressure, China does not have these troubles, and the investment security of RMB bonds is more prominent; Third, the proportion of global capital allocation of RMB bonds is still low, and the investment dividend of capital inflow can be obtained by adding RMB bonds in advance.
As China's economy returns to the track of steady growth, overseas central banks and sovereign wealth funds are accelerating the allocation of RMB bonds. In the case that the Federal Reserve continues to raise interest rates sharply, which leads to a decline in the price of US debt (the yield of US debt rises), they need to speed up the decentralized allocation of reserve assets to alleviate the pressure of shrinking foreign exchange reserves.
Comparatively speaking, under the influence of the US dollar's record high, the pace of global arbitrage capital and unincorporated wealth management products returning to the RMB bond market is slightly slow.
In Xia Chun's view, the market is beginning to realize that RMB bonds are still attractive after excluding inflation and exchange rate factors, and these capitals may re-add RMB bonds in the second half of the year. If the Fed slows down the rate hike due to the increased risk of economic recession in the United States, the US dollar index will rise and fall, and global arbitrage capital will return to emerging markets, and China is undoubtedly their first choice for investment.
Jonathan Fortun, an economist with the International Finance Association (IIF), said that in the next few months, many factors will affect global capital flows, among which the peak time of global inflation and China's economic development prospects will be the two major focuses. If China's economy continues to grow steadily, more capital will flow into A-shares and RMB bonds as an important hedging measure to hedge the risk of global economic recession.
"The trend of global capital continuing to increase its holdings of RMB bonds will not be reversed because of the phased departure in the first half of the year, because asset management institutions realize that with the steady growth of China's economy, long-term holdings of RMB bonds can more effectively share the global economic development dividend." The above hedge fund managers are outspoken.