Time for BRICS to broaden their domestic-currency bond markets

By Cui Zhiyuan Source:Global Times Published: 2017/9/6 23:28:39

Time for BRICS to broaden domestic bond markets

Illustration: Luo Xuan/GT

With the BRICS Xiamen Summit having just concluded, it is high time to reflect on what could generate new momentum for the bloc's next stage of development. This reflection can benefit from a longer-term perspective.

This year is the 500th anniversary of the Reformation, the 10-year anniversary of the global financial crisis and the ensuing Great Recession, and the second year of the formal operation of the BRICS New Development Bank (NDB). The key concept that connects these three events is that of "original sin."

The connection between the Reformation and the problem of "original sin" is obvious. Martin Luther nailed his Ninety-Five Theses to the door of the Castle Church in Wittenberg on October 31, 1517 and his main point was against the sale of papal indulgences.

But what was the "original sin" of the US subprime crisis and the Great Recession?

The financial crisis inspired many proposals to reform the international monetary system, but these proposals basically fell into two categories. The first involved creating a real international currency, the new version of John Maynard Keynes' "Bancor" of the 1940s, to replace the US dollar as the dominant international reserve currency. This class of proposals is not politically feasible, at least in the short run. Money has three functions: a unit of account, a means of payment and a store of value.

As an international currency, the US dollar's first two functions are not difficult to replace: for example, trade between Brazil and China does not need to use US dollar as a means of payment. However, the US dollar's international role as a store of value is hard to substitute.

A telling example is that the US dollar actually appreciated in 2008 amid the financial crisis since the US Treasury debt markets was still the only safe haven available.

The second category of proposals involves the creation of alternative safe reserve assets. It requires the emerging economies to establish deep and liquid domestic government bond markets. The underdevelopment of many emerging economies' domestic long-term debt markets and the inability to issue bonds abroad in their own currencies is called their "original sin problem" by economists Barry Eichengreen and Richardo Hausmann.

It is promising to note that overcoming the original sin seems already to be a leading strategy of the NDB. On July 18, 2016, the NDB issued its first "green" bond in the amount of 3 billion yuan ($459 million), with a five-year tenor, in the Chinese interbank bond market. On June 1 this year, NDB President K.V. Kamath announced that the bank will issue bonds in all five member countries in their own currencies.

Further, the NDB could learn from the "Asia Bond Fund 2" (ABF 2). The major response by the Asian countries to the crisis of 1997-98 was the creation of the Asian Bond Fund.

There were two phases. The "Asia Bond Fund 1"(ABF 1), announced in June 2003 by the Executive Meeting of East Asia-Pacific Central Banks (EMEAP) from 11 countries and regions, was to channel investment into US dollar-denominated sovereign and quasi-sovereign bonds issued by Asian entities. In December 2004, the more significant ABF 2 was launched, and the EMEAP committed $2 billion to invest in local currency-denominated Asian bonds. The ABF 2 was established as a Singapore-based unit trust listed on Hong Kong stock exchange.

It consists of nine funds, eight of which are member country funds. The ninth fund is an index fund of those eight funds. The point of this index fund is to encourage the low-cost participation of passive investors.

The BRICS should do something similar to the ABF 2, and a multipolar world of safe reserve assets can be eventually achieved.

The author is a professor at the School of Public Policy and Management und er the Tsinghua University. bizopinion@globaltimes.com.cn
Newspaper headline: Time for BRICS to broaden domestic bond markets


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