To President Xi Jinping and Premier Li Keqiang, The issuance of RMB sovereign debt in London means rising momentum in longstanding efforts to make Renminbi a major international reserve currency in the near future. In this article, Dan Steinbock discusses how the economic potential of China’s bond market is stunning and how London hopes to consolidate a foothold as an offshore RMB centre that its rivals will find hard to match.
Actually, the first RMB debt issues in London – about RMB 2 billion of Renminbi bonds – have already been issued by the Chinese Development Bank. Last year, the UK government also issued a RMB 3 billion sovereign bond, which made London the first in the West to do so.
However, these moves were just a prelude for what Prime Minister David Cameron has described as the “golden year” of bilateral relations.
To Cameron and his Chancellor George Osborne, China’s RMB sovereign debt in London is a culmination of a longstanding effort to establish an edge over the US and European rivals in attracting Chinese investment. Chinese President Xi Jinping’s trip was preceded by Osborne’s visit to China last month, when he opened bidding for the £11.8 billion High-Speed Two (HS2) rail link contracts.
To President Xi Jinping and Premier Li Keqiang, the issuance of RMB sovereign debt in London means rising momentum in longstanding efforts to make Renminbi a major international reserve currency in the near future.
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The World’s Third Largest Bond Market
Only a decade ago, China’s bond market was still relatively small and barely known internationally. In the past few years, however, Beijing has carefully nurtured a large and increasingly diverse bond market that features both public and private debt.
Today, China’s bond market is the third largest in the world, trailing right after the United States and Japan. In brief, it’s “the largest market you haven’t heard of”.
The growth of China’s bond market has been dramatic. Starting from US$ 58 billion in 1997, it soared to US$5.3 trillion in the first quarter of 2015, which translates to a compound annual growth rate of 38 percent.
Currently, the Chinese market includes four major kinds of bonds, including government bonds, central bank notes, financial bonds and (non-financial) corporate bonds.
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 UK’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 their footprints.
Reminiscent of the Shanghai-Hong Kong stock connect, the idea of a Shanghai-London connect also emerged last fall. China and the UK 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 UK so eager to become a major overseas RMB centre 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 liberalised financial services before the global crisis in 2008-9, it would have been swept by the meltdown in the US, 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 US Fed is widely expected to raise interest rates in the coming months, the value of the US 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 markets 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 centre 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 US, Japan, UK, 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.
This commentary was published by Chinaorg.cn (China’s official government portal) on October 19, 2015.
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About the Author
Dr. Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, see http://www.differencegroup.net
