China's Yuan-Bond Repurchase Use Surges, Yet Foreign Outflows Continue

China's New Bond Repurchase Channel for Overseas Investors

China's new bond repurchase channel for overseas investors is seeing increased usage, signaling growing participation in the onshore market. The initiative, launched in September via the Bond Connect channel from Hong Kong, allows foreign investors to use a key liquidity function for bond trading, part of Beijing's effort to make yuan-denominated assets more appealing according to Bloomberg. October data from the China Central Depository & Clearing Co. showed 13.1 billion yuan ($1.84 billion) in bond repurchases through this channel, up sharply from 810 million yuan in September according to Bloomberg. Despite the uptick, the policy has yet to reverse broader trends of foreign outflows from Chinese bonds.

Meanwhile, China is continuing to raise capital in global markets, with a new euro bond offering to raise up to €4 billion ($4.6 billion) expected to be marketed shortly according to Bloomberg. The offering is part of a broader strategy to deepen China's sovereign yield curves, particularly in markets like the eurozone, where Chinese borrowing activity has historically been less liquid according to Bloomberg. The euro bond follows a recent successful dollar bond sale, which attracted strong investor demand amid easing U.S.-China trade tensions.

Foreign investors are also shifting their bond portfolios, with Japan increasing its holdings of U.S. Treasuries while China's stake continues to decline. Japan's holdings of U.S. Treasuries hit their highest level since August 2022, reaching $1.189 trillion in September according to Reuters. In contrast, China's holdings dipped to $700.5 billion, reflecting a decade-long trend of diversifying away from the dollar for strategic and economic reasons according to Reuters. Analysts point to the low yields on Chinese bonds as a key factor limiting foreign appetite, making it harder to leverage positions using repurchase agreements according to Bloomberg.

Strategic Moves and Geopolitical Concerns

The decline in Chinese holdings of U.S. Treasuries is part of a broader effort by Beijing to reduce reliance on the dollar and bolster the yuan. A slowing economy, post-COVID challenges, and trade barriers have added pressure on the yuan, prompting Beijing to cut its Treasury portfolio to support the currency according to Reuters. At the same time, China is expanding its financial reach elsewhere, with a planned euro bond offering aimed at diversifying funding sources and improving benchmark yields according to Bloomberg. The euro market has historically been a less liquid space for Chinese issuers, making this move strategically significant for long-term financial positioning according to Bloomberg.

On the geopolitical front, concerns continue to mount regarding espionage activities linked to China. UK parliamentarians have been warned by MI5 about covert efforts by China-linked agents to gather sensitive information through recruitment headhunters and professional networks according to Sky News. The intelligence service highlighted how the Chinese Ministry of State Security is leveraging professional networking sites to cultivate long-term relationships, raising alarms about national security according to Sky News. The warning follows a failed prosecution of suspected Chinese spies and ongoing debates in the UK over how to respond to such activities.

Diplomatic Engagement and Market Signals

Amid these developments, China is also signaling a potential diplomatic overture to Japan, with Foreign Minister Wang Yi hinting at high-level discussions with Japanese counterpart Toshimitsu Motegi according to Economic Times. The possible meeting between Chinese President Xi Jinping and Japan's new Prime Minister Sanae Takaichi at the APEC summit in South Korea could be a key moment in a complex relationship marked by historical tensions and economic interdependence according to Economic Times. Takaichi's hardline stance, including her visits to the controversial Yasukuni shrine, has raised concerns in Beijing about Japan's alignment with the U.S. and its potential impact on regional dynamics according to Economic Times.

In the markets, China's push for deeper global integration is being closely watched. The recent bond repurchase facility and euro bond offering are part of a broader strategy to attract foreign capital and support the yuan's international role according to Bloomberg and according to Bloomberg. However, the low yields on Chinese bonds remain a hurdle, with Stephen Chiu of Bloomberg Intelligence noting that the appeal of U.S. Treasuries continues to outpace domestic alternatives according to Bloomberg. Meanwhile, the U.S. bond market remains a focal point for global investors, with Japan's increased purchases offsetting some of the outflows from China and the UK according to Reuters. The interplay between geopolitical tensions, market fundamentals, and strategic policy shifts will continue to shape the landscape for China's financial outreach in the months ahead.