A SURGE in holdings of policy bank bonds lifted offshore holdings of Chinese yuan-denominated bonds to a record high in May, as their inclusion in a major global index aided inflows, and as rising risk aversion boosted the appeal of fixed income.

Foreign investors held a record 419.83 billion yuan (US$60.74 billion) worth of bonds issued by China’s policy banks at the end of May, an increase of 50.75 billion yuan over the previous month, according to calculations using data from China Central Depository and Clearing Co. (CCDC), China’s primary clearing house.

In nominal terms, that was the largest monthly increase in offshore holdings of policy bank bonds since CCDC began including foreign investor data in its monthly releases in June 2014. It was the biggest percentage increase since September 2016.

China’s policy banks, comprising China Development Bank, the Agricultural Development Bank of China and the Export-Import Bank of China, help to fund China’s policy initiatives.

Their bonds are not only highly liquid — nine of the interbank market’s most-traded bonds in May were issued by policy banks, according to the National Interbank Funding Center — but offer higher yields than government bonds of the same tenor.

Offshore holdings of Chinese government bonds stood at a record 1.14 trillion yuan at the end of May, up 24.98 billion over the month.

Total offshore holdings of all bonds traded on the interbank market rose by 109.28 billion yuan from a month earlier to a record 1.88 trillion yuan as of May 31, according to data from CCDC and the Shanghai Clearing House, which published data late Thursday afternoon last week.

It was the biggest such jump since June 2018.

May was the second in a 20-month inclusion process of Chinese government and policy bank bonds in the Bloomberg Barclays Global Aggregate Index. With a 6 percent weighting in the index, some analysts expect the move could draw US$150 billion into Chinese fixed income.

Data from the bond connect program, which offers access to the mainland’s onshore interbank market through Hong Kong, showed trading volumes and average daily turnover reached record highs in May, with trading concentrated in policy bank bonds, negotiable certificates of deposit and Chinese government bonds. (SD-Agencies)