Offshore holdings of bonds issued by China’s policy banks rose to a new high in September after the cabinet announced a tax-rule change aimed at attracting more foreign participants to the world’s third-largest bond market.
In September, offshore investors raised holdings of bonds issued by policy banks by 11.5 billion yuan to 342 billion yuan ($49.43 billion), the highest on record, according to Reuters calculations based on data from China Central Depository and Clearing Co (CCDC), the primary bond clearing house.
China’s policy banks disburse loans to support government policy.
Most of September’s increase – 9.87 billion yuan – was for bonds issued by China Development Bank, favored for their high liquidity.
Investors boosted their holdings of China Agricultural Development Bank bonds by 1.89 billion yuan, but reduced their holdings of those issued by Export-Import Bank of China by 275 million yuan, the data showed.
Offshore investors also lifted their holdings of Chinese treasury bonds, or CGBs, by 24.7 billion yuan in September to a record high of 1.06 trillion yuan. The level has increased 19 consecutive months.
The proportion of Chinese government bonds held by offshore institutions rose to a new high of 8.1 percent from 8.0 percent at the end of August.
In late August, China’s cabinet said foreign investors would be exempt from enterprise or value added taxes of as much as 16 percent on interest income earned in the domestic bond market for three years.
While some market players say details of the tax change remain unclear, it makes policy bank bonds, seen as effectively risk-free but carry higher yields than equivalent CGBs, much more attractive to offshore investors.
China Development Bank’s 10-year bond CN180205= yielded 4.29 percent on Wednesday, compared to 3.628 percent for benchmark 10-year CGBs CN10YT=RR, according to Refinitiv Eikon data.