(Yicai Global) Sept. 4 -- Overseas institutions remain optimistic about yuan assets despite drastic fluctuations in recent months with foreign holdings of Chinese debt increasing for the 17th consecutive month in July.

Overseas institutions increased their holdings by CNY66.6 billion (USD9.7 billion) in July, Economic Daily reported today. Yuan bonds held by overseas institutions totaled CNY1.6 trillion (USD234.5 billion) as of the end of the month.

As for the structure of bonds held by overseas institutions, treasury bonds are still the most popular. Overseas holdings of treasury bonds increased by CNY65.1 billion for the month.

The participation of overseas institutions participation in China's bond market has significantly increased. Its proportion of the Chinese treasury bond market rose to 7.7 percent in July, while increasing by 2.7 percentage points for the year. The proportion in the overall Chinese bond market has also increased to 2.24 percent, continuing to hit a record high.

The increase means that while investment values and the attractiveness of yuan assets continue to be accepted by more and more investors, the country's bond market continues to open up to more and more foreign institutions.

The increase seen in overseas institutions' holdings of yuan bonds in July was lower than that of June. Data shows that overseas institutions increased their holdings CNY52.8 billion in July, lower than the CNY87 billion posted in June. Shanghai Clearing House holdings increased CNY8.3 billion, down from CNY23.3 billion in June.

Changes in the cost of carry and exchange rates related to the yuan are key factors, according to Chen Xiao, an analyst at Ping An Securities. Foreign investors' main purpose for investing in the Chinese bond market is to make profits, he said, adding that the comprehensive returns are important after taking cost of carry and changes in exchange rate into consideration.

Foreign investors remain concerned about the interest rate and exchange rate of the yuan. The China-US cost of carry fell to a historically low level of close to 60 basis points in July, down by some eight basis points compared with the average in June. The yuan's exchange rate continued to depreciate in July, which has enabled overseas institutions to reduce their holdings of yuan bonds.

Although the increase of overseas institutions' yuan debt holdings cooled in July, several experts said that short-term fluctuations in the interest rate and exchange rate will not affect the general trend of foreign capital flowing into China's bond market. Overseas institutions will probably continue to steadily increase their holding of yuan bonds in the future.

The recent exchange rate of the yuan against the dollar has rebounded while the stable economic fundamentals will support the yuan exchange rate in remaining stable at a reasonable and balanced level, Xie Yaxuan, chief macro analyst at China Merchants Securities said, adding that this will attract foreign investors.

The offshore yuan depreciated 2.6 percent against the dollar in July, reaching 6.8024. It continued to depreciate by 0.58 percent to 6.8417 in August, before rebounding to 6.9583.

Editor: William Clegg