Market players have welcomed last week’s agreement between China, Japan and South Korea to invest in each other’s government bond markets as a step towards ditching the dollar and globalizing the renminbi.
At the Trilateral Finance Ministers and Central Bank Governors meetingon Wednesday in Manila, China, Japan and Korea agreed to promote local currency markets in the region by investing in each other’s government bond markets.
Experts said that the move signalled reduced reliance upon the dollar and a move toward increased use of Asian regional currencies in financial transactions.
Dong Tao, head of non-Japan Asia economics at Credit Suisse, told Emerging Markets: “Put simply, this agreement is about access to the Chinese bond market.”He added: “Everyone realizes the US dollar is troubled, the euro is troubled and the yen is going nowhere. All the traditional currencies have experienced sharp structural deterioration since these central banks have lost their monetary discipline. These factors all serve to increase the appeal of the renminbi.”
Asian central banks’ bond purchases would be facilitated via a currency swap, which would allow China “to send its currency unit to the rest of the world without undermining the stability of the exchange rate,” Tao said.
Strong demand from Asian central banks – seeking forex reserve diversification – will increase the pace of convergence between long-term interest rates in South Korea and the US Treasury benchmark, Young Sun Kwon, economist at Nomura, told Emerging Markets.
The subsequent reduction in Asian government bond yields will boost the region’s fiscal position and corporate liquidity, Kwon said. Although foreign investors account for 18% of demand for Korean government bonds, only a small portion of the investor base is from Asia, he said.
“These high-level initiatives for cross-border sovereign bond purchases should encourage private sector investors in Asia to step up intra-regional portfolio flows.”
Yu Yongding, a former member of the People’s Bank of China (PBOC) monetary policy committee, told Emerging Markets that more “co-ordination” in the region was welcome.
However he said the idea an integrated financial architecture to boost returns from domestic savings, in particular was “far fetched”. “It’s difficult to talk about Asian money staying in Asia because, since we save, we are running current account surpluses,” he said.
Reducing Asia’s dependence on the dollar by expanding the use of domestic currencies for intra-regional trade settlement should be the next priority for the region, Yu concluded. Japan’s initial investment in Chinese bonds is expected to be tiny in relation to the country’s $1 trillion of total foreign exchange reserves, but analysts said it was the symbolism more than the size that mattered more at this stage.
This article was originally published by Euromoney’s sister publication, Emerging Markets