Unifying Government Bond Markets in East Asia
10 Pages Posted: 2 May 2012
Date Written: December 1, 2003
This special feature identifies a potential synergy between the growth of foreign exchange reserves and the development of regional bond markets. The synergy arises from the use of public obligations to finance (or to sterilize) holdings of foreign exchange reserves. The fact that these obligations have commonly taken the form of central bank debt, however, has meant that much of the opportunity for them to develop the bond market has been missed. Drawing on Singapore’s experience, one can envision how changes in debt management practices by governments, and corresponding changes in liability structures of central banks, could help realize the potential. In particular, the government can “overfund” its fiscal needs. Subsequent deposits of the proceeds in the central bank would then replace the central bank’s liabilities to market participants. As side benefits, money markets in the region would gain better balance (in a sense defined below) and central banks would obtain sufficient government securities to allow the normal use of repurchase operations. The greatest impediment to the adoption of the proposal would probably be the natural reluctance of finance ministers to issue and parliaments to authorize the needed expansion of recognized government debt. The political commitment in the region to the development of regional bond markets could, however, overcome this. This special feature focuses on East Asia, especially Indonesia, Korea, Malaysia, Taiwan and Thailand. In addition, The People’s Bank of China, faced with the need to sterilize a significant increase in foreign exchange reserves, has also begun to issue substantial amounts of its own bills. Thus, consideration of mobilizing government debt for this purpose is timely. India also seems to be reaching the stage at which other central banks have begun to issue their own liabilities in the past.
The following sections outline the transactions needed to transform central bank debt to market participants into government debt proper, and the benefits to the bond market and to monetary operations of doing so. The next section discusses the issues that arise, including servicing the government deposit at the central bank, the duration of the extra government debt, implications for credit ratings and consistency with the government budgetary process.
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