China's domestic bond market saw a surge of international capital inflows in the first half of 2018. What was behind this sharp increase? What was the impact on longer term interest rates and the renminbi's exchange rate? And will the upward trend continue? The following article seeks to examine these questions.

Data from three different organizations show that in the first half of 2018，international investors substantially increased their holdings of Chinese bond assets. The State Administration of Foreign Exchange (SAFE) said in its China's Balance of Payments publication that investments in Chinese bonds from overseas reached a net US$75.7 billion in the first half of 2018，up 741% from a year ago. US$69.8 billion of that total came from overseas institutional investors. In the same period，Chinese domestic renminbi financial assets held by overseas institutions and individuals were valued at 404.1 billion yuan，up 923% year on year，according to the People's Bank of China publication Domestic RMB Financial Assets Held by Overseas Entities. Statistics from the China Central Depository & Clearing Co. Ltd. and Shanghai Clearing House showed that the balance of Chinese domestic bonds held in trust by overseas institutions reached 400.9 billion yuan at the end of the first half of 2018，a year-on-year growth of 969%.

Factors Behind the Investment Upturn

The large increase in international investment reflected cyclical and structural factors.