The Growth of Domestic Currency and Foreign Debt and the Internationalization of RMB Complement Each Other (Open Discussion)
In 2021, China's foreign debt will continue to grow steadily.
At the end of the year, the balance of full-scale external debt in both domestic and foreign currencies was US$2,746.6 billion, an increase of US$345.8 billion over the end of the previous year.
Among them, the balance of foreign debt in local currency was US$1,236.7 billion, an increase of US$235.7 billion compared with the end of the previous year, contributing 68% of the increase in external debt; foreign debt in local currency accounted for 45% of the balance of external debt, an increase of 3.3 percentage points compared with the end of the previous year.
The increase in the proportion of foreign debt in local currency will help reduce the currency mismatch risk of China's foreign debt.
Foreign debt in local currency falls under the scope of RMB internationalization, which helps to get rid of some common problems in emerging markets.
As the local currency is not freely convertible and the local financial market is underdeveloped, emerging markets often face international solvency constraints. At the same time, they need to raise funds in overseas markets, especially medium and long-term financing, resulting in currency mismatch and maturity mismatch.
This makes emerging markets not only afraid of the appreciation of the local currency exchange rate, which will affect exports and thus affect the solvency, but also fear of the depreciation of the local currency exchange rate, which will increase the debt repayment burden.
The floating of the RMB exchange rate has a regulating effect on the burden of foreign debt in the local currency.
For example, from the end of June 2015 to the end of June 2020, the RMB exchange rate has fallen by 14%.
During the same period, China's foreign debt balance in local currency increased from 5,035.7 billion yuan to 5,689.9 billion yuan, an increase of 654.2 billion yuan.
However, the balance of foreign debt in local currency denominated in US dollars fell from US$823.7 billion to US$803.7 billion, of which the negative valuation effect of exchange rate conversion reached US$111 billion.
It can be seen that the devaluation of the RMB has played a role in "writing down" the foreign debts denominated in the local currency in US dollars.
Another example is that from the end of June 2020 to the end of 2021, the RMB exchange rate has risen by 11%, and the resulting positive valuation effect has reached 112.6 billion US dollars, contributing 48% of the increase in local currency foreign debt during the same period.
This part of the increase in foreign debt is not a real increase in overseas debt by domestic entities, but only a change in the book, which will change with the change of the RMB exchange rate in the future.
Foreign debts in local currency are liabilities of domestic entities, but assets of foreign investors. These are two sides of the same coin.
In the international financial environment of long-term low interest rates, zero interest rates, and wide liquidity, global negative-yielding bonds are prevalent, reaching US$18.38 trillion by the end of 2020.
Renminbi bonds, especially 10-year Renminbi treasury bonds, still have a positive yield of 2% to 3%, which greatly increases the global supply of safe assets and enhances the international appeal of Renminbi assets.
According to the data disclosed by the International Monetary Fund (IMF), by the end of 2021, the balance of foreign exchange reserves held in RMB in the world will be 336.1 billion US dollars, an increase of 2.7 times compared with the end of 2016; among the foreign exchange reserve assets in the disclosed currency composition, RMB The share of reserves was 2.79%, an increase of 1.72 percentage points.
Since the fourth quarter of 2018, the RMB has been the world's fifth largest international reserve currency for 13 consecutive quarters.
At present, more than 70 foreign central bank institutions have entered China's inter-bank bond market, and more than 75 countries and regions have included RMB into their foreign exchange reserves.
The latest survey by the Official Forum of Monetary and Financial Institutions (OMFIF), an independent international think tank, in 2021 shows that about 30% of the world's central banks plan to increase their holdings of RMB reserves in the next 24 months, and 70% of the central banks are considering increasing their holdings in the long term.
At present, in the face of inflation that has been rare for many years, most of the world's economies are accelerating the pace of monetary tightening, and emerging markets are facing the pressure of capital outflow and exchange rate depreciation.
In order to prevent and defuse foreign debt risks, it is necessary for the government and the market to strengthen the research and judgment on the marginal changes of domestic and foreign situations, improve the monitoring of cross-border capital flows, and formulate plans to deal with the reversal of capital flows.
In addition, the flexibility of the RMB exchange rate should be enhanced, and the exchange rate should be further used to adjust the balance of payments and absorb internal and external shocks. Predictability, improve the liberalization and facilitation of transactions, and attract medium and long-term capital inflows.
(The author is the global chief economist of BOC Securities)
Guan Tao