China investing in offshore bonds as dollar surges

Chinese investors are investing in offshore bonds as the U.S. dollar surges and US interest rates increase sharply, latest data shows, deepening capital flow fears and adding pressure on the sinking yuan.

China's outbound investment under the cross-border Bond Connect scheme was 301.5 billion yuan $42.31 billion at the end of August, up 34 per cent from a month ago, the Shanghai Clearing House said late on Friday.

The southbound link of the scheme allows mainland Chinese to buy tradable bonds in Hong Kong, regardless of currency, and the investment has grown quickly every month since March, when holdings totalled just 15.9 billion yuan, or 5 per cent of the current size.

There are increasing Chinese appetites for offshore bonds because of different monetary policies that widen interest rate differences between China and the United States.

The spread between 10 years U.S. and Chinese treasuries has exceeded 100 basis points - the biggest gap in 15 years - as the Federal Reserve raises rates to combat inflation while the People's Bank of China eases policy to bolster its economy.

China's surging outbound debt investment, coupled with a cooling foreign interest in Chinese onshore bonds, threatens to worsen capital markets outflows.

Overseas investors have reduced holdings of Chinese bonds for a seventh consecutive month in August, while China has a capital and financial account deficit of $80.2 billion at the end of June, according to the latest official data.

Increasing outflows threaten to add more deprecation pressure on the yuan, which has lost nearly 11 per cent against the dollar, easing to a near 28 month low.

The dollar index hit a 20 year high as the market braced for more U.S. rate rises ahead.

The official China Securities Journal reported on Saturday that China may need to cut banks' required reserve ratio RRR in the fourth quarter to keep liquidity ample.