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"Increasing Outstanding External Debt Denominated in RMB Complementary with RMB Internationalization"
People's Daily overseas edition Op-Ed calls for greater RMB rate flexibility
Today’s newsletter is not long. It is a translation of an April 5 Op-Ed on Page 06 of《人民日报》海外版 the overseas edition of the People’s Daily:《本币外债增长与人民币国际化相得益彰》Increasing Outstanding External Debt Denominated in Local Currency Complementary with RMB Internationalization.
Dr. Guan was the director general of the department of balance of payments at the State Administration of Foreign Exchange (SAFE) during 2009-2015 and press spokesperson of the SAFE during 2014-2015. Prior to that, Guan functioned as deputy director general of the general affairs department of the SAFE.
Dr. Guan spoke at a symposium [Xinhua] presided by Premier Li Keqiang on April 7. He gave an interview to Chinese media about the symposium.
My friend and colleague Jiang Jiang yesterday published a translation of the interview How does a symposium with Chinese premier feel like on his curiously-named Ginger River Review substack.
《本币外债增长与人民币国际化相得益彰》Increasing Outstanding External Debt Denominated in Local Currency Complementary with RMB Internationalization.
By Guan Tao (Global Chief Economist of Bank of China International（BOCI） Securities)
People's Daily Overseas Edition (Page 06, April 5, 2022)
In 2021, China's external debt continued to grow steadily. At the end of the year, China totaled US$ 2,746.6 billion in outstanding external debt denominated in both domestic and foreign currencies, an increase of US$ 345.8 billion compared with the end of the previous year.
Among them, the outstanding external debt in the domestic currency (yuan/RMB) recorded US$ 1,236.7 billion, an increase of US$ 235.7 billion compared with the end of the previous year, contributing to 68% of its increase and accounting for 45% of the external debt, which is an increase of 3.3 percentage points compared with the end of the previous year.
A higher proportion denominated in the local currency in China’s external debt is conducive to reducing the risk faced by China in currency mismatch.
External debt in local currency, which falls under the category of RMB internationalization, helps to get rid of some common problems in emerging markets. Emerging markets often face international solvency constraints due to to the non-convertible local currency and the underdeveloped local financial markets the need to go to overseas markets for financing, especially for the medium- and long term, typically results in currency and maturity mismatch.
All the above makes emerging markets fear the appreciation of the local currency, which affects exports and then liquidity, and the depreciation of the local currency, which increases the burden of debt servicing.
The floating RMB exchange rate has a moderating effect on the country’s burden of external debt denominated in the local currency. From the end of June 2015 to the end of June 2020, for example, the RMB exchange rate fell by a cumulative 14%. Over this period, China's outstanding external debt in the local currency increased from RMB 5,035.7 billion to RMB 5,689.9 billion, an increase of RMB 654.2 billion.
However, the outstanding external debt in the local currency, if calculated in US dollars, fell from US$ 823.7 billion to US$ 803.7 billion, a decline of US$ 111 billion. It can be seen that RMB devaluation has played a role in “writing down” the external debts in local currency, if calculated in US dollars.
Another example is that, from the end of June 2020 to the end of 2021, the RMB exchange rate rose by 11%, resulting in an added US$ 112.6 billion if calculated in US dollars, which contributed to 48% of the increase in external debt in the local currency over the period. This part of the increase in external debt is merely a change in the books, instead of an actual increase in overseas debt undertaken by China’s domestic entities. And it will change as the RMB exchange rate changes in the future.
External debt in local currency are liabilities assumed by domestic entities - and assets held by foreign investors, which are the two sides of the same coin. In the international financial environment characterized by long-term low interest rate and even zero interest rate plus ample liquidity, negative bonds prosper globally, reaching US$18.38 trillion by the end of 2020.
RMB bonds, especially 10-year RMB Treasuries, still maintain a positive yield of 2%-3%, significantly enhancing the global supply of safe assets and the attraction of RMB assets.
According to data from the International Monetary Fund (IMF), by the end of 2021, the outstanding foreign exchange reserve assets worldwide held in RMB amounted to US$ 336.1 billion, an increase of 2.7 times compared with the end of 2016; the share of RMB reserves accounted for 2.79% of the global foreign exchange reserve assets where their denominating currencies have been publicly disclosed, an increase of 1.72 percentage points.
The RMB has been the world's fifth-largest international reserve currency for 13 consecutive quarters since the fourth quarter of 2018. More than 70 foreign quasi-central bank institutions have entered China's inter-bank bond market, and more than 75 national and regional monetary authorities have included the RMB in their foreign exchange reserves.
According to a recent survey by the Official Monetary and Financial Institutions Forum (OMFIF) in 2021, an independent think tank,some 30% of central banks plan to increase their renminbi holdings over the next 24 months, while 70% will increase their involvement over the longer term.
Now we’re facing inflation rarely seen in years. Around the world, most economies’ monetary tightening is accelerating. Capital outflows and currency depreciation are putting pressure on emerging market.
To prevent and defuse external debt risks, it is necessary, at the government and the market levels, to study more and predict better the marginal changes at home and abroad, monitor cross-border capital flows more closely, and draw up plans to deal with capital flow reversals.
In addition, we should enhance the flexibility of the RMB exchange rate, giving further play to the role of the exchange rate as a “shock absorber” to adjust the balance of payments and absorb internal and external shocks. We should continue to prudently promote the institutional financial opening, including the bond market, increasing the transparency and predictability of policies and intensifying the efforts to liberalize and facilitate transactions, which can attract medium- and long-term capital inflows. （Enditem）
The original Chinese version is here on Page 06 of《the overseas edition of the People’s Daily.
Lin (Lynn) Liu, a student pursuing a Master's degree in international journalism at Tsinghua University, contributed to the translation.
Again, a translation of Dr. Guan’s recent interview How does a symposium with Chinese premier feel like is available on Jiang Jiang’s Ginger River Review substack.
Finally, my friend and colleague Yang Liu, on his Beijing Channel substack, yesterday published a full translation of China's Market Access Negative List for 2022, which should come in very handy for multinational corporations and chambers of commerce in China. The newsletter also answers:
What is the Market Access Negative List?
What are the Differences Between Foreign Investment Negative List (外资准入负面清单) and Market Access Negative List (市场准入负面清单)?
Timeline of China’s Market Access Negative List
Major Changes in the 2022 version Compared with 2020
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