By Andrew Galbraith

SHANGHAI (Reuters – Inflows into Chinese government bond (CGBs), pushed offshore holdings to record levels in 2021. But, at a slower pace because of diverging monetary policy from the United States and China. This eroded Chinese bonds’ yield premiums.

CGB holdings held by overseas investors reached a new record of 2.45 trillionyuan (384.51 Billion), according to Monday’s data by China Central Depository and Clearing Co. (CCDC), which is the central depository institution that controls China’s interbank bonds market.

This was a 30% increase on the year before, according to Reuters. It is less than the 43.7% growth recorded in 2020.

The record-breaking 1.08 trillion Yuan was reached by quasi-sovereign bonds held by China’s central banks. This was an increase of 1%. It was 18% higher than a year ago, but a jump of 84.4% in 2020.

Slower growth was due to narrowing yield spreads between U.S.-Chinese yields. By December, the gap in 10-year yields had fallen nearly 100 basis point to 124.52 by December. In 2020, foreign CGB holdings grew at the fastest pace ever recorded. This almost reversed their move.

Standard Chartered analysts Jeffrey Zhang and Becky Liu of OTC (OTC) stated that while they anticipate Chinese rates falling in the first quarter 2022 due to more policy easing and slow growth, they believe they will rise in future quarters, and that there could be higher demand and stabilizing growth.

They stated in a note that 2022 would see a divergence in monetary policies between China and the majority of DM economies. “We see a risk for more material monetary easing in H1, with more broad-based reserves requirement ratio (RRR), cuts in addition to targeted actions through resending and rediscounting facility measures.”

However, they stated that “foreign inflows might rise steadily at CNY700-800bn due to relatively high carry, and likely better returns.”

On Tuesday, additional data on interbank market holdings from Shanghai Clearing House wasn’t available.

($1 = 6.3718 )