Data from the China Central Depository and Clearing Co (CCDC) released on Wednesday showed that offshore investors held government bonds worth a total of 1.06 trillion yuan ($154.52 billion) at the end of November.

That was 18.6 billion yuan less than a month earlier, according to Reuters' calculations based on the data.

It was the first decrease in government bond holdings offshore since February 2017, but comes a month after combined data from CCDC and the Shanghai Clearing House showed offshore investors trimmed their holdings of all onshore Chinese bonds by 9.6 billion yuan in October.

"The very volatile and weak yuan, as well as the low yield from lax monetary policy, has made bond investors hesitant," said Gary Ng, an economist at Natixis in Hong Kong.

China's yuan has weakened more than 5 percent this year as the Sino-US trade war exacerbated already-slowing domestic growth, and as a narrowing gap between Chinese and US yields puts pressure on the currency.

Chinese two-year notes already yield less than their US counterparts, and the spread of Chinese 10-year notes over 10-year US notes was at 36.6 basis points on Wednesday, down from more than 140 basis points at the end of 2017.

Investors and analysts expect the gap to narrow further as the US Federal Reserve pursues tighter policy even as China eases to support growth.

TAX CHANGE

Offshore investors cut their holdings of all interbank market bonds cleared through CCDC to 1.42 trillion yuan in November from 1.44 trillion yuan a month earlier, but policy bank bonds saw a small rise in offshore interest as the Ministry of Finance clarified a previously announced tax exemption.

Offshore holdings of bonds issued by policy banks, which disburse loans to support government policy, rose by 1.27 billion yuan to 327.4 billion yuan, the data showed.

The tax exemption, which went into effect on Nov. 7 and lasts for three years, makes higher-yielding policy bank bonds more attractive to offshore investors.

Ng at Natixis said that a weakening economy would likely continue to make Chinese government bonds less attractive in the near term, noting that weak manufacturing activity in November added to concerns about slowing growth.

"The long promised fiscal stimulus has not been seen in the market yet," said Ng.

In the longer term, the inclusion of onshore Chinese bonds in global indexes beginning next year will attract passive flows, he said.