Overseas institutions have now increased their net holdings of Chinese government bonds for a third consecutive month, a sign that relatively stable yields and a firmer currency are enhancing the safe-haven allure of Chinese assets during a global selloff in US Treasuries.

Data released by the People's Bank of China Shanghai Head Office on Monday showed that offshore investors added roughly 9.5 billion yuan in net terms to their Chinese government bond portfolios in July, marking the third straight month of accumulation. Policy bank bonds saw a smaller net increase of just over 600 million yuan, while holdings of negotiable certificates of deposit swung back to a reduction.

Overall, foreign ownership of interbank market bonds stood at 3.21 trillion yuan at the end of July, up about 10 billion yuan from the end of June. The increase comes as inflation concerns stemming from the ongoing Middle East conflict have fueled expectations of further Federal Reserve rate hikes, triggering a marked selloff in US government debt and pushing the 10-year Treasury yield up by more than 250 basis points in July alone.

By contrast, Chinese government bond yields held steady or edged lower during the month, while the yuan appreciated by more than 0.5%, improving the currency-hedged returns for foreign holders of yuan-denominated assets. Liu Jie, head of Greater China macro strategy at Standard Chartered Bank, noted that with most global yield curves undergoing a bearish steepening in July, the modest inflows into China's onshore bonds reflect the market's growing recognition of the country as a safe-haven destination.

Given that foreign positioning in Chinese bonds remains historically low and that outflows linked to carry-trade activity are fading, Liu expects overseas investors to continue adding to their onshore Chinese bond holdings at a moderate pace over the coming months.