China is snapping up Japanese government bonds, and it’s not just for the returns – CNBC

Bank notes of the Chinese yuan, Japanese yen and the U.S. dollar.

Zhang Peng | LightRocket via Getty Images

SINGAPORE — China’s recent purchase of Japanese government bonds surged to the highest level in more than three years – as the country more than tripled its holdings between April and July this year, compared to the previous year.

During those three months in 2020, China bought 1.46 trillion yen ($13.8 billion) of medium- to long-term JGBs on a net basis, according to Japanese media Nikkei, which cited data from Japan’s finance ministry and its central bank. That was 3.6 times more than the same period last year.

In comparison, the U.S. increased its purchases by only 30% in the same period, that data reportedly showed. Europe, meanwhile, sold off 3 trillion yen worth of JGBs, according to Nikkei.

Yields on JGBs are around zero, making them an unlikely option as an investment since the returns are comparatively low.

But analysts told CNBC there could be other reasons why China would want to buy those bonds.

“One of the odd things about the current environment is that JGBs are no longer an obviously unattractive fixed income security, depending on the currency you are funding the purchase in,” said Ross Hutchison, investment director of global fixed income at Aberdeen Standard Investments.

For instance, China can actually earn more on the investment by buying 30-year JGBs in the Japanese yen and swapping their currency exposure back

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