In its Fixed Income Insights report, AllianceBernstein said despite difficulties in managing its economic and financial reforms, China is determined to see them through.
“While the policy balancing act in pursuing reforms and keeping the floor under economic growth is a difficult one, the Chinese government has so far succeeded,” AllianceBernstein director of Asia Pacific fixed income Hayden Briscoe said.
“Given the importance and potential benefits of the reforms, we believe the government will stay focused on the challenge.”
The global asset manager highlighted that the heart of these reforms include the internationalisation of the nation’s currency and the liberalisation of its capital markets.
“The [GFC], and the difficulty it caused for exporters and importers in accessing US dollar finance, taught China the limitations of conducting its trade in US dollars,” Mr Briscoe said.
“As a result of government actions since then, 20 per cent of China’s global trade is now settled in renminbi (RMB). We see potential for that to increase to 50 per cent in the next few years.”
AllianceBernstein said by China liberalising its capital markets it could mitigate the political sensitivity of needing to hold much of its US$4 trillion in foreign exchange reserves in US government bonds.
Although the asset manager highlighted that the US government has frequently accused China of buying treasuries to keep its currency undervalued.
“One way to mitigate this would be for more of China’s claims on the US to be denominated in RMB, and one way for China to encourage foreigners to borrow in RMB is by liberalising the country’s capital markets,” Mr Briscoe said.
“The move would eventually lead to China’s bond and equity markets being included in global indices, forcing significant country reallocations in global index-based portfolios,” he said.
