London: First overseas RMB center for China's government debt
- By Dan Steinbock
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E-mail China.org.cn, October 19, 2015
While government bonds still dominate some two-thirds of the total market, financial and non-financial corporate bonds have soared to about 30 percent of the market.
Last spring, many countries in Asia and elsewhere joined the China-proposed Asian Infrastructure and Investment Bank (AIIB), while Europeans stood aside. What changed the game was the U.K.'s decision as the first major Western country to participate in the AIIB. It paved the way for the rest of Europe to follow in the footprints.
Reminiscent of the Shanghai-Hong Kong stock connect, the idea of a Shanghai-London connect also emerged last fall. China and the U.K. have agreed to carry out a feasibility study on the project, which, along with major trade deals, is likely to be discussed during President Xi's state visit.
Low foreign participation
Stars are well-aligned for bilateral relations. While London needs foreign investment in its infrastructure, Beijing seeks to export excess production capacity to sustain its economic growth.
What makes the U.K. so eager to become a major overseas RMB center is the simple fact that foreign ownership of Chinese bonds remains minimal at about 2 percent, relative to other Asian markets, such as Korea (14 percent), Thailand (16 percent), Malaysia (31 percent), not to speak of Indonesia (40 percent).
Despite occasional criticism in the West, China's gradualist and reversible approach has served it well. If Beijing really had liberalized financial services before the global crisis in 2008-9, it would have been swept by the meltdown in the U.S., European and Japanese financial markets.
Moreover, foreign ownership is a mixed blessing. In good times, it can boost debt markets; in bad times, it may devastate entire economies. As the U.S. Fed is widely expected to raise interest rates in the coming months, the value of the U.S. dollar will climb. Consequently, those Asian economies that are highly reliant on foreign owners and dollar-denominated debt - Indonesia, for instance - may find it challenging to defuse the adverse effects.
In contrast, China - as it is opening its financial services gradually - can move ahead more steadily and take back steps when needed.
Chinese bond market's huge potential
In the past, China relied on bank loans for credit growth. In the near future, bond market will diversify risk from the banking system, but also ensure a more sustainable funding source, particularly for rapidly-growing and labor-intensive small-and-medium enterprises (SMEs). In turn, London hopes to consolidate a foothold as an offshore RMB center that its rivals will find hard to match.
Today, China's bond market accounts about 50 percent of its GDP, relative to an average of 200 percent for major advanced economies, such as the U.S., Japan, U.K., France and Italy.
Of course, China remains an emerging economy and, as such, subject to the kind of vulnerabilities that advanced economies are in a better position to contain. Nevertheless, the economic potential of China's bond market is stunning.
The author is a columnist with China.org.cn. For more information please visit: http://www.shenbo75.com/opinion/DanSteinbock.htm
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