Recently, there have been new changes in foreign holdings of RMB bonds. According to relevant data, in December 2022, overseas institutions ended their 10 month continuous reduction of RMB bond assets and turned to a certain scale of increase in holdings. The phased reduction and return to increase in holdings reflect the confidence of international investors in the long-term improvement of the Chinese economy. Despite the many uncertain factors in the external environment, the charm of RMB assets remains undiminished.
In recent years, with the continuous expansion of the bond market opening up, RMB bonds have been gradually included in major international bond indices. In addition, the positive returns of RMB bonds have led to a continuous increase in foreign holdings of domestic RMB bond assets. From December 2018 to January 2022, the net increase of domestic RMB bonds held by foreign investors under the custody of the Central Depository and Clearing Corporation has been continuous for 38 months, with a cumulative increase of 2309.2 billion yuan, an increase of 1.62 times. After entering February 2022, some foreign investors began to continuously reduce their holdings of RMB bonds, causing concerns among some market participants.
It should be noted that under the influence of changes in the external environment, it is normal for some channels of foreign investment to undergo temporary and phased adjustment, which does not affect the confidence of foreign investment in China's bond market in the medium and long-term. Last year, the bank's foreign exchange settlement and sales, as well as foreign-related income and expenditure, were both in surplus throughout the year. The foreign exchange market was expected to be generally stable, and market transactions were rational and orderly; The inflow of funds such as goods trade and foreign direct investment has played a leading role in stabilizing cross-border capital flows. All of these reflect the resilience of China's foreign trade development, indicating that the prospects for China's economic development and the huge consumer market still have strong attraction for foreign investment.
Since December last year, foreign funds have entered the Chinese financial market, and international investors have increased their holdings of RMB assets, indicating that foreign confidence in China's development continues to strengthen. From the data of last year, as of the end of last year, the amount of bonds held by overseas institutions in China's bond market was 3.46 trillion yuan, including 3.39 trillion yuan of bonds held in the inter-bank market, with an average annual growth rate of nearly 25% in the past five years. Since the beginning of this year, the cumulative net inflow of northbound funds has exceeded 150 billion yuan, surpassing the net purchase amount for the whole of last year. The net inflow in January exceeded 140 billion yuan, becoming the highest monthly record since its opening.
The enthusiasm of overseas investors for RMB bonds demonstrates the "Chinese gravity", which includes factors such as a good economic foundation, high-level opening up of the financial market, relatively high returns on RMB assets, and gradually increasing risk aversion. Looking ahead, there is still considerable room for foreign investment to participate in China's bond market. China's bond market is large and liquid, but compared with other major economies and even emerging economies, the proportion of 3.5% foreign capital in China's inter-bank bond market is still significantly low, which means that there is still potential for foreign capital to increase the allocation of RMB bonds in the future. Supported by the long-term improvement of China's economic fundamentals, the trend of foreign investment increasing its holdings of RMB bonds will not change.
It should be noted that with the continuous increase in holdings and changes in the international economic situation, after several years of rapid and continuous increases in holdings, foreign investment allocation behavior will become more stable in the future. I believe that as long as China continues to implement responsible macroeconomic policies, maintain economic operation within a reasonable range, persist in promoting the marketization, legalization, and internationalization of the domestic bond market, persist in promoting institutional financial opening, and create an increasingly convenient, transparent, and predictable market environment for investors, RMB bond assets will still have important allocation value globally.
