(Yicai Global) Feb. 23 -- Despite increased foreign investment in the Chinese mainland stock market, overseas institutions cut their holdings of Chinese bonds by CNY106.6 billion (USD15.5 billion) in January, the biggest reduction since March last year.

More than half of the Chinese bonds that foreign investors sold were government securities, reducing their ownership of treasury bonds by as much as CNY66.3 billion (USD9.6 billion), according to the latest data.

Overseas institutions had raised their holdings of Chinese bonds by CNY57.1 billion in December.

The sell-off was likely occasioned by expectations for a rise in bond yields and a moderate weakening in the Chinese yuan, according to Zhang Meng, a macro and forex strategist at London-based Barclays.

But international investors expect capital inflows to resume this month, mainly for hedging and arbitrage, while demand for index-linked government bonds is also helping the situation, Zhang added.

China’s economic recovery is still in an early stage, and growth prospects are somewhat uncertain. In the view of most institutional investors, the recovery still needs to prove itself, though it will be hard for them to be optimistic about the bond market because of the country’s loose monetary policy and ongoing fiscal support.

The yield on China’s 10-year treasury bonds has remained around 2.9 percent lately, as the market awaits more economic data to verify the recovery’s extent, Xia Yinyin, a China interest rate strategist at UBS Securities, told Yicai Global. The bond yield will increase soon, she noted.

The issuance of government bonds will remain relatively intensive in the future, Xia predicted, adding that this month’s net issuance will likely surge 74 percent to about CNY930 billion from January.

Moreover, with the approach of the Two Sessions -- the annual meetings of China’s two main political bodies -- expectations for more government stimulus will probably increase, leading to a rise in risk appetite, Xia said.

Editors: Liao Shumin, Futura Costaglione