Foreign Institutions Keep Boosting China Bond Holdings for 13 Consecutive Months

China's bond market continues to see an increase in foreign capital. Data released by the Shanghai headquarters of the People's Bank of China on October 22 shows that by the end of September, foreign institutions held 4.39 trillion yuan worth of bonds in the interbank market. This also means that since September last year, foreign institutional investors have increased their holdings of bonds in China's interbank market for 13 consecutive months.

"The comprehensive yield of RMB bonds has been good this year, attracting foreign investors to increase their allocation of RMB bonds," said Li Hongyan, Deputy Director of the State Administration of Foreign Exchange, at a press conference held by the State Council Information Office on October 22. Foreign investment in domestic bonds continues to flow stably, with a cumulative net increase of more than 80 billion US dollars in the first three quarters.

Foreign investment in RMB assets shows a good momentum

"In the recent period, the overall momentum of foreign investment in RMB assets has been good," Li Hongyan said. So far, the total amount of RMB bonds held by foreign institutions in China has exceeded 640 billion US dollars, reaching a historical high. In addition, driven by the rise in domestic stock markets, since late September, the overall net purchase of domestic stocks by foreign capital has increased, and the willingness of foreign capital to allocate RMB assets has been further strengthened.

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Li Hongyan believes that the scale of foreign investment in RMB assets still has room for further improvement, supported by multiple favorable factors:

On the one hand, China's economic fundamentals are stable and improving, providing a good macro environment. This year, China's high-quality economic development has been orderly promoted, and a series of incremental policies have been implemented recently, which will continue to consolidate the long-term positive development trend of the economy.

On the other hand, China's high-level opening-up provides a good policy environment. In recent years, China's financial market opening-up has been steadily advancing, providing a series of diversified investment channels for foreign capital. The third plenary session of the 20th Central Committee of the Communist Party of China made important arrangements to promote high-level financial opening-up. With the further implementation and effectiveness of relevant policies, the attractiveness of domestic capital markets to foreign capital is expected to continue to increase.

Li Hongyan also said that RMB assets have very good diversification effects for risk dispersion and provide good investment value. China has built a relatively complete and deep financial market system, with stable RMB value and diverse assets, which have a relatively independent performance in the global scope, helping global investors to diversify and disperse risks in asset allocation. At the same time, the proportion of RMB in global cross-border transactions has been steadily increasing, and its international influence has been gradually strengthening, making it an important choice for global investors to diversify their asset allocation.

Enterprises maintain rational willingness to exchange and sell foreign exchange

Looking back at the first three quarters of this year, the characteristics of China's foreign exchange income and expenditure are prominent. Li Hongyan summarized them in five aspects: the resumption of net inflow of cross-border funds; the trend of exchange and sale of foreign exchange tends to be basically balanced; enterprises maintain a rational willingness to exchange and sell foreign exchange; foreign exchange market transactions are relatively active; and the scale of foreign exchange reserves remains basically stable.In terms of cross-border capital flows, Li Hongyan introduced that in the first three quarters of this year, the overall balance of bank customer-related foreign exchange transactions was slightly in surplus, with a small surplus in the first quarter, a shift to a deficit in the second quarter, and a return to surplus in the third quarter. In terms of the main components, the inflow of goods trade continued, foreign investment in China gradually improved, and domestic entities' outward investment was generally orderly.

Focusing on micro-entities, Li Hongyan said that recently, the RMB exchange rate has fluctuated with increased flexibility. Enterprises and other entities have chosen to exchange currency based on cross-border trade and investment financing needs, with the scale of exchange transactions in September increasing by 14% compared to August. At the same time, in recent years, enterprises' awareness of exchange rate risk neutrality has been continuously strengthened, with an increase in the scale of forward exchange contracts signed in August and September, indicating that enterprises are actively adapting to market fluctuations through exchange rate risk management.

"In an open economy and under the marketization of exchange rates, enterprises need to pay attention to exchange rate risk management issues," Li Hongyan said. It is necessary and cost-effective for enterprises to incur certain costs for hedging.

The resilience of China's foreign exchange market continues to improve steadily.

With the Federal Reserve starting the interest rate reduction cycle, the Sino-US interest rate differential is expected to narrow gradually. How to view the spillover impact of the Federal Reserve's monetary policy adjustment on China's financial market?

"Although the operation of China's foreign exchange market has been affected, it has generally remained stable, mainly due to the support of the domestic economic fundamentals," Li Hongyan said. In the future, as China's economy maintains high-quality development and high-level opening up continues to advance, market resilience will be further enhanced, and the foreign exchange market will have a more solid foundation and conditions to maintain stable operation.

Li Hongyan analyzed: First, the continuous consolidation of China's economic recovery and upward trend helps to solidify the internal foundation for the stable operation of the domestic foreign exchange market; second, China's construction of a new system for a higher level of open economic type helps to improve the stability of international balance of payments and foreign exchange market operation; finally, the steady improvement of China's foreign exchange market resilience helps to adapt to and mitigate the impact of changes in the external environment.

In terms of exchange rate changes, according to Li Hongyan, since the beginning of this year, the spot exchange rate of the RMB against the US dollar in China has generally depreciated by about 0.3%, and the RMB exchange rate has remained basically stable in two-way fluctuations. Even if the RMB exchange rate against the US dollar rebounded more noticeably in August and September, it was a universal response of various non-US dollar currencies after the weakening of the US dollar, and the increase in the RMB was at an average global level, with a relatively mild impact on imports and exports.

Li Hongyan said that the foreign exchange management department will continue to monitor and assess the international economic and financial situation and the policy trends of major developed economies, continuously accumulate and summarize experience in response, enrich the policy toolbox, carry out counter-cyclical macro-prudential regulation in a timely manner, and effectively maintain the stable operation of the foreign exchange market.