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Economy

China's capital inflows hit 7-year high on bond-buying bonanza

Sustaining the influx would help fuel Chinese lending to emerging economies

The Chinese yuan appreciated to its strongest in roughly four years against the dollar last week.   © Reuters

BEIJING -- Net inflows of funds into China reached $88.5 billion, their highest in seven years, during the January-March quarter, as a wide interest rate spread drew global bond investors to the world's second-largest economy.

Gross inflows during the quarter came to $590.1 billion, the highest figure in comparable statistics going back to 2010, a Nikkei analysis of State Administration of Foreign Exchange data shows. Gross outflows reached $501.6 billion.

A sustainable influx of global funds would put China in a better position to expand funding for Belt and Road infrastructure projects in emerging countries.

Nikkei examined quarterly changes in data on monthly cross-border inflows and outflows of funds through bank accounts. This is considered a better gauge than the current-account balance, since the SAFE data is based on actual cross-border transfers at Chinese banks by businesses and consumers.

One reason for the increased inflows is international investors stepping up purchases of Chinese bonds. The balance of yuan-denominated bonds held by foreigners came to 3.55 trillion yuan ($551 billion) at the end of March, growing nearly 60% over the past year, as investment poured in through such avenues as Hong Kong's Bond Connect.

This reflects widening interest rate gaps. While most advanced economies eased monetary conditions further last year in response to the coronavirus pandemic, China traced a swift path to economic normalization.

These developments helped widen the rate spread on 10-year government debt from the U.S. and China, spurring buying of Chinese bonds by institutional investors and central banks around the world.

The share of Chinese government bonds owned by foreigners topped the 10% mark for the first time in January. As the U.S. Federal Reserve starts to seek an exit from monetary easing, Chinese bond yields remain notably high.

FTSE Russell will start adding Chinese government bonds to a widely followed index in late October. Major institutional investors, such as Japan's massive Government Pension Investment Fund, track the FTSE World Government Bond Index. Fully incorporating Chinese government debt would translate to about $130 billion being poured into the market.

Trade also drove the influx of funds. There is a stronger demand for yuan among companies, a SAFE analysis shows, as the currency is expected to appreciate.

The yuan attained its most recent peak of 6.41 to the dollar on May 10, strengthening to a level not seen since June 2018.

Another factor is Chinese companies receiving a concentration of orders for products and materials as the pandemic disrupted supply chains in emerging economies.

"European companies were paying the cost of imports upfront in yuan in order to be priority destinations for components from China," a manager at an international banking group said.

China's current-account balance -- which measures cross-border transactions in goods and services -- amounted to a $75.1 billion surplus in the first quarter.

China has largely maintained a current-account surplus in the recent past. But cross-border bank transfer data showed nearly consistent net outflows from late 2014 through 2019. Contributors included a weak outlook on the value of the yuan stemming from economic uncertainties, as well as a rise in outbound mergers and acquisitions.

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