Developing the European dollar bond market is the best hot money pool

Li Shongmin The CPI has risen to 4.4% per cent in October this year, according to statistics released by the National Bureau of Statistics. In addition to expectations of a revaluation of the renminbi, China's asset prices and inflation have a "familiar" situation, no accident, 2006-2007 years of the story may repeat.　　In this case, how monetary policy can cope with the looming bubbles and inflation is clearly one of the top priorities of the central bank, and the governor's statement on "hot money pools" is also saying that the pressure of monetary policy is intensifying. Why Japan does not need large-scale reversal this must be a very childish question, of course, also need to have the answer. Japan, like China, has a huge trade surplus and a wealth of foreign exchange assets. But Japan has stopped intervening in the foreign exchange market since 2004 (and, of course, Japan's something in 2010), which suggests that the same surplus has not put too much pressure on the Japanese monetary authorities, because of Japan's open channels for overseas investment, Foreign exchange reserves account for only a small proportion of their foreign currency assets. Under external pressure, Japan opened its capital account in December 1980, when Japan's total external assets were $159.7 billion trillion, of which OFDI accounted for 12.3%, indirect investment accounted for 71.6%, and reserve assets accounted for 16%.　　After 1980, Japan's foreign exchange assets continue to rise, but basically maintain the existing structure unchanged, by 2008, foreign exchange reserves accounted for 17.9% of foreign assets (the middle of the first low after the high volatility). From Japan's practice can see the essence of another problem: China's sterilisation pressure from the unreasonable foreign exchange reserve management system, and China's foreign investment channels are not smooth. At the end of 2009, China had $2.4513 trillion trillion in foreign exchange reserves, with a total external assets of $3.4601 trillion in the same year, and foreign exchange reserves accounting for 70.8% of total external assets. Instead of staying in China, these reserves are invested in US Treasuries and corporate debt markets. In other words, the result is the same as Japan, where all foreign exchange assets are invested overseas, and Japan's foreign exchange assets are concentrated in civil, private investment, while China is transferred to the central bank by sterilisation.　　It was this sterilisation process that tied the accumulation of foreign assets (both surpluses) and the domestic renminbi issue, and the accumulation of foreign exchange assets successfully kidnapped monetary policy. This process is not what the central bank would like to see, with foreign exchange assets concentrated in the hands of the central bank, with the subjective will to impose capital controls. But more is affected by objective factors, mainly because the strength of Chinese financial institutions and foreign exchange size does not match.　　In the 80 's Japan, a large number of financial institutions in the United States and Europe to invest, these financial institutions overseas investment, in fact, Japan's foreign exchange assets to open up a very smooth channel. The European dollar bond market is the best "pool" of foreign exchange assets in China and Japan, which eventually flowed to global financial markets, with different: China has a reversal, Japan does not; China's fixed-income products accounted for a large proportion of Japanese securities products accounted for relatively large.　　In the case of continued capital account Control, if the central bank's pressure is to be eased, the key is to cut back on the scale of the reversal, disconnect the accumulation of foreign exchange assets and the renminbi issue. Based on these factors, the author believes that the best way is to develop a larger European dollar debt market in China, which is denominated in dollar fixed income products, including U.S. dollar-denominated foreign government bonds, dollar-denominated foreign company bills, Chinese companies issued in dollar-denominated bills. That is to keep the original investment structure unchanged, but to move these transactions to China.　　In fact, some dollar-denominated fixed-income products have been circulating in the Chinese market, including the U.S. dollar medium-term bills issued by PetroChina, Goldman Sachs dollar issue of the 7-year bill (one of ICBC's financial products). The benefits of developing a European dollar bond market in China are obvious: first, the underwriting business of Chinese financial institutions can be enhanced.　　Previously, these financial products (corporate bonds, bonds) were underwritten by domestic financial institutions, and if they were transferred directly to the mainland, a significant portion of the underwriting would be transferred to mainland financial institutions. Second, the rate of return on China's foreign exchange assets can be improved.　　Opening up the European dollar bond market in China, which is equivalent to "direct selling" of China's foreign exchange assets, avoids indirect investment through safe and financial institutions (QFII), increasing efficiency and the yield of the ultimate holder. Third, China can promote overseas investment. As the European dollar bond market opens up new low-cost financing channels for China's foreign investment, it will be very beneficial to China's outward investment.　　In particular, SMEs may open up new financing channels through the innovation of development financial institutions. Four, we can avoid the mistakes of Japan. As mentioned earlier, Japan avoided large-scale sterilisation, even without intervening in exchange rates, because of the early progress in internationalization of the financial services industry and the smooth development of foreign investment. But Japan has also left a lesson that Japan's model has led to a "hollowing out" of Japan's domestic financial markets. Japan's construction of Tokyo International Financial Center has been difficult, mainly because the vast majority of foreign exchange funds in the international circulation, the domestic foreign exchange assets are seriously inadequate. As a result, Tokyo has always been less international.　　On the contrary, if the European dollar debt market (such as Beijing or Shanghai) is built on the mainland, the problem can be avoided and the international financial centre will be helped to shape rapidly in China. Some of the problems to be solved are the basic conditions for a European dollar bond market to be built in China, which has a natural advantage in developing European dollar debt markets as excess savings can be transformed into large foreign exchange assets through current account and financial accounts. Of course, if we want the European dollar bond market to achieve substantial development, also need to carry out a series of adjustments: first, to reform the foreign exchange reserve management system. Currently inChina's foreign exchange reserves in fact far exceed the actual needs of the Chinese to safeguard international economic security and stability, a considerable part can turn to the private sector, the rest of the establishment of foreign Exchange Reserve Investment Fund, as a sovereign fund external investment, while full-time service to national strategic goals. Second, the capital account management system should be adjusted. How to introduce foreign governments, companies to China to issue dollar-denominated fixed income products, the need for institutional adjustment.　　At the same time, China's domestic enterprises issued the medium-term paper has a corresponding experience, need to study how to further promote. Thirdly, how to maintain effective capital account management. Need to form two firewalls, one is in the domestic European dollar bond market and international financial markets between the formation of a firewall, to prevent the return of funds raised in the mainland to the mainland, but also to prevent the international financial market of hot money into our European dollar debt market.　　Second, in the European dollar bond market and the mainland renminbi circulation between the formation of a firewall, only the domestic residents and enterprises to buy sinks, foreign exchange reserves to increase these two parts to allow access to the exchange market, it is very good to cut off the accumulation of foreign exchange assets and domestic renminbi flow between the synchronization. (Author of the Chinese Academy of Social Sciences, the International investment Room, deputy researcher) "The first financial daily" annual subscription price of 360 yuan, the National Code 3-21, Post Office subscription hotline 11185, the issue hotline 400-610-1010.