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Source: www.asiaecon.org |

CHINESE CRISIS FOCUS: 'PANDA BONDS'


Yu Yongding, Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, believes that creating “panda bonds”, a Chinese renminbi-denominated bond from a non-Chinese issuer, sold in the People's Republic of China, will diversify the use of the nation's $2 trillion foreign reserves.


Yu Yongding, Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, believes that creating “panda bonds”, a Chinese renminbi-denominated bond from a non-Chinese issuer, sold in the People’s Republic of China, will diversify the use of the nation’s $2 trillion foreign reserves.  This would hopefully boost the liquidity in countries that were hit hard by the credit crunch.

Yongding believes that the most critical problem is that amount of U.S. Treasury bonds being bought by China, when there is no sign of recovery in the near future.  The United States only has two options, printing more money or issuing more bonds, attempting to raise money in order to stabilize the economy.  Either of these options would negatively effect the price of bonds held by foreign investors, China being the largest holder of treasury bonds.

Until the United States shows signs of recovering, China should exchange their U.S. Dollars in foreign reserves for other internationally recognized currencies, in order to diversify its portfolio.

The Chinese government should also purchase strategic assets and materials like gold, oil and natural gas.  This should be done in a gradual manner and will help secure consistency in this unsteady global market.

A section of the foreign reserve should be placed into the International Monetary Fund (IMF).  This will then be loaned out to countries that are struggling, creating overall a better global economy.

The benefits of “panda bonds” come from there ability to reduce Chinese purchases of U.S. Treasury bonds, internationalize the renminbi, resolve cash shortage problems in some nations and promote the stability of the global economy.

“Panda Bonds are debt, denominated in yuan, issued by foreign banks and organizations and sold to Chinese financial institutions. Strained for financing, foreign issuers would receive money in yuan by issuing Panda Bonds, and use the money raised to buy US dollars held by China’s financial institutions, and pay interest and principal in yuan, which can be bought at the foreign exchange market.”-Yu Yongding

“Panda bonds” are not the only way to reduce dollar reserves, Chinese financial institutions can purchase assets in Europe or Japan, or simply increase stocks of strategic materials using foreign reserves.

Regardless of how it is accomplished, diversification should be the primary goal of the Chinese foreign reserves.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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