China’s local currency bond market forecast to draw US$400b annually

Foreign flows to China’s local currency government bond market could balloon to US$400 billion annually, an analysis from the Institute of International Finance showed on Tuesday, Reuters reports.

Central banks were behind 60 percent of the flows to local currency Chinese government bonds in the first quarter of 2021 as allocation of reserves to Chinese bonds continued to increase, the data showed.

While flows to Chinese bonds have continued to rise as the country opens up to foreign investors and its bonds are included in major indexes, “they remain small relative to China’s GDP and share of global trade,” said the IIF report.

It estimated that if global yuan reserves increased from 1.8 percent to 3 percent of China’s gross domestic product over the next 10 years, “annual flows to the local bond market would consistently exceed US$400 billion.

Separate data from the IIF showed that for last year a net US$47.3 billion from foreign portfolios made its way into Chinese stocks, while US$198.3 billion was attracted by a variety of debt instruments.

In the first quarter of this year, net foreign inflows to Chinese stocks and debt totaled US$83.1 billion.

“There is obvious scope for reserves in yuan to increase but we work with conservative projections given persistent diplomatic tensions,” the IIF said, citing a “tense and complex” relationship between Beijing and Washington.

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