Asian Bond Markets Are Booming And Renminbi Bonds Are Surging

Federal Reserve officials will hold a policy meeting on 15-16 December, and the market is widely expected that the Federal Reserve will raise the benchmark federal funds rate by 0.25 percentage points.

The interest rate has remained unchanged at nearly zero level since December 2008.

Yellen, chairman of the Federal Reserve, will not only decide whether to start the first rate hike in 10 years next week, but also consider how to ease the international market on the question of how to raise interest rates in the future.

The so-called international market, of course, includes China.

For 21 years, people remember that the year of 1994 was due to what happened in the global bond market, especially the Asian bond market.

1994 is a year of hope for the global bond market.

In 1994, the Federal Reserve of Alan Greenspan killed the Kidder Peabody company in the interest rate hike that exceeded the market expectations, causing the collapse of Orange County in California, causing chaos in Mexico and the foreshadowing of the Asian financial [0.00%] storm three years later.

Although China formally abolished the link between the RMB and the US dollar in 2005

But how much less is Beijing linked to the US dollar?

China is very dependent on Trade and at the same time, the US and Asian countries have been trading with China extremely.

The Chinese government's efforts to pform the economic growth pattern from dependence on exports and investment to relying on services are still in progress.

China's economic growth from 8% to below 7% is constantly testing people's limited patience with reform.

Any upward pressure on the renminbi will probably hit its main trading partner in Asia.

Goldman Sachs said that if the dollar appreciated by 10%, China's economic growth would probably be cut by 1%.

Policymakers still do not forget this nightmare.

In 2013, when the chairman of the Federal Reserve, Bernanke, was about to withdraw from the zero interest rate policy, the then governor of South Korea admitted that the ghost of 1994 still kept him awake.

Lloyd Blanke, the chief executive of Goldman Sachs, still can't help looking back at the 1994 mood.

For example, Michael Hartnett, a strategist at the Bank of America and Merrill Lynch, published the research report entitled "a repeat of the 1994 moment".

Greenspan's interest rate shook Asia because the Fed's rate hike decided to push up the US dollar.

Asian currencies are unable to defend their currencies by pegging the US dollar. [-0.02%], which is settled in US dollars, has overwhelmed many companies.

The Thai baht was first decoupled under the rising pressure of the dollar and depreciated sharply in 1997.

The crisis spread from Bangkok to Jakarta to Seoul to Wall Street, and even played a role in Russia's default in 1998.

The question now is, will the Federal Reserve start a new round of tightening cycles? Will this happen again? The odds are not great.

The current Federal Reserve Chairman, Janet Yellen, is more concerned with the second targets of the dual goal of the Federal Reserve than Greenspan, in order to achieve full employment.

But at present, the global market is facing a huge and difficult factor: China.

This factor did not exist in 1994.

Is the world's second largest economy ready to normalize Yellen's monetary policy? We have many reasons to worry that China is not ready to become the first victim of the Fed's interest rate hike.

In October, Chinese finance minister Lou Jiwei once warned the United States that

Be cautious.

Former US Treasury Secretary Laurence Summers also questioned the Fed's interest rate hike as soon as next week.

Lou Jiwei knows more about China's economic growth than we do.

Meanwhile, in 1997, when the Asian financial crisis broke out, Summers, then the US Treasury Secretary, knew more about the global economy than most of us.

China today is facing excessive credit growth, tens of billions of dollars in bad debts.

The opaque situation of the Bank of China obscures the real financial situation of its state-owned enterprises.

In April, investors applauded the fact that Jia became the first Chinese developer to default on the US dollar debt.

The market is happy that the Beijing government allows any enterprise to default.

The market interpreted this move as the Chinese government is letting go.

To decide the market.

But there has been no further progress since then.

More likely: all companies are trying to repay their debts, but the debt or the Beijing government is trying to cover up the problem? The answer is the latter.

But it is more and more difficult to do so, because once the US Federal Reserve raises interest rates, the US dollar will soon return from emerging markets.

In 1994, the scale of the domestic bond market in Asia was not large.

But at the end of 2014, according to the online data of Asian bonds, East Asian emerging market debt reached US $5 trillion, while corporate debt reached US $8 trillion and 200 billion.

In China, the sale of bonds in renminbi has surged 83% to 3 trillion and 300 billion US dollars since January.

In 2014, excluding Japan, Asian countries increased their debt by US dollar settlement by 48%.

Concerns about the Fed's interest rate increase have eased Asian bond issuance slightly.

In Korea, the US dollar bonds issued by enterprises and banks accounted for less than 29% of total bonds in 2015.

But Frederic Neumann from HSBC warned that foreign investors held large amounts of Asian bonds, which increased the risk of their sudden sell-off.

Once the market turbulence leads to panic selling, there will be a big fluctuation in the yields and stocks of currencies and bonds.

The last time Asia faced a tight financial situation was 7 years ago. Loose monetary policy has added an unprecedented $4 trillion and 500 billion asset to the central bank's balance sheet.

During the years when the Federal Reserve, the Bank of Japan and the European Central Bank started their respective quantitative easing plans, the global debt level has surged to the level of US $57 trillion.

This is 40% higher than the level of Lehman crisis in 2008, and debt to GDP ratio has reached 286%.

The bond market does not appear to be too big to fail, but the Federal Reserve, like the 1994 old technology, will have a big and irreparable situation.

This is China, or the last thing we need to face.