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Can China's government debt attract int'l investors?

By Liang Jie (People's Daily Overseas Edition)

11:20, August 15, 2011

Amid the global financial turmoil caused by the U.S. and European debt crises, China recently made a high-profile announcement that it would raise 20 billion yuan from a massive sovereign bond issue in Hong Kong in mid-August. Industry insiders generally believe that this bond issue plan shows the Chinese government's determination to promote Hong Kong's social and economic development and to deepen economic and financial cooperation between the mainland and Hong Kong.

Asian sovereign debt becoming safe haven for investors

"Asian sovereign debt is increasingly becoming a safe haven for investors worldwide due to the U.S. and European debt crises as well as the systemic risk in global stock markets posed by the U.S. credit rating downgrade. China's issue of yuan-denominated bonds in Hong Kong is an important measure to stabilize global financial markets," said An Guojun, an associate research fellow at the Institute of Finance and Banking under the Chinese Academy of Social Sciences.

"The yuan-denominated bonds to be issued this time are only worth 20 billion yuan, accounting for about 5 percent of the total yuan deposits in Hong Kong and a tiny percentage of China's nearly 6.8 trillion yuan of outstanding national debt. Therefore, the upcoming bond issue is more symbolic than practical," said Ma Xiaojun, associate professor of finance at Nankai University.

Making solid preparations for RMB internationalization

The recent downgrade of U.S. debt and credit rating has made RMB internationalization a hot topic again. RMB internationalization was first proposed in 2008 shortly after the global financial crisis broke out. At that time, the international monetary system’s domination by the U.S. dollar was widely denounced by the world.

Insiders said that it is unhealthy in the long run for the U.S. dollar to hold the dominant position exclusively. Currencies of emerging powers should play more important roles in the international financial system. The reasoning behind China’s issuance of national debt at this time is obvious and that is to make solid preparations for RMB internationalization.

In fact, the bond market of the Government of China has become a pillar for the stability of the Asian financial market. According to a report recently issued by the Asian Development Bank, emerging economies of Asia, including China, will build on the strong economic growth of 2010 to continue to increase the portions of the bond markets of their domestic currencies in the global bond market in 2011.

Some analysts believe that since the U.S. debt, which was regarded as a "safe haven," was downgraded in the rating for the first time in the history, the credit of the U.S. dollar is being questioned to an unprecedented degree. The U.S. debt crisis has indeed made China's U.S. dollar assets increasingly risky, but on the other hand, the weak U.S. dollar has also made the RMB more attractive.

In the next decade, the U.S. government will have to experience a course of reducing its deficits and the U.S. dollar will be gradually weakening, but the RMB will gradually strengthening. In this decade, China should seize the strategic opportunity to promote the RMB internationalization in its own pace.

Chinese government debt carries little default risk

"As the Chinese government debt is essentially risk-free, and the RMB appreciation trend will obviously continue, the 20 billion yuan worth of bonds will certainly be sought after, and are almost bound to be oversubscribed," Ma said. The main purpose of the upcoming bond issue is to attract overseas investors by providing investment opportunities, not to solve China's domestic financial problems.

Many industry insiders in Hong Kong have expressed welcome for the Ministry of Finance's decision to issue yuan-denominated bonds in the region again, believing that it reflects the central government's support for the development of Hong Kong as an offshore RMB center. The bond issue will further promote the development of the region's RMB bond market by offering high-quality bonds to investors.

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