SHANGHAI: Foreign investors held more than a tenth of all outstanding Chinese government bonds (CGBs) for the first time in January, official data showed, as demand surged on a combination of higher yields and a stronger yuan.

Total offshore holdings of CGBs stood just shy of 2 trillion yuan ($309.70 billion) at the end of January, according to data from China Central Depository and Clearing Co (CCDC), the main interbank bond market clearing house.

That accounted for 10.3% of outstanding CGBs and was an increase of 121.11 billion yuan from the previous month, according to Reuters calculations. It was the biggest percentage monthly increase since July 2018.

Holdings of quasi-sovereign bonds issued by China's policy banks rose 4.1% from the end of December to a record 956.95 billion yuan, CCDC data showed.

Total foreign holdings of all interbank bonds stood at a record 3.54 billion yuan, accounting for 3.4% of all outstanding bonds, according to Reuters calculations using data from CCDC and the Shanghai Clearing House.

January's rise extends a steady increase in foreign ownership of Chinese bonds, driven by their phased inclusion in major global indexes and relatively tight monetary policy.

While the spread has narrowed from November highs, 10-year CGBs continue to yield 200 basis points more than 10-year US Treasuries, according to Refinitiv data.

But analysts expect the premium to drop as the United States embarks on renewed economic stimulus and as Chinese authorities pledge to continue supporting the economy with ample liquidity.

Market fears that an unexpected liquidity squeeze in January that raised money market rates indicated a shift to monetary tightening were "overdone", Larry Hu, economist at Macquarie Capital in Hong Kong, said in a note.

"It's way too early for a comprehensive policy tightening (in China)," he said.