BB to diversify forex investment
BB to diversify forex investment
Chinese bonds attract attention
Shafiqul Islam Jibon
The central bank of Bangladesh has decided to invest a part of its foreign exchange (forex) holdings in the Chinese government bonds to increase its income from foreign sources.
The Bangladesh Bank (BB) took the move to avert any impact of the any fluctuation of dollar rate in the global market on the country's forex reserve and explore the option of generating income from investments in Chinese bonds, top official sources said.
"It is a new concept of protecting the forex reserve by investing the same in different other currencies rather than a single one, in this case, the US dollar," a senior BB official told the FE Monday.
The Chinese bonds were not convertible before. But now they are gradually opening up their bonds for investments by the central banks around the world.
The BB would like to seize the opportunity, he added.
Its BB board of directors approved the proposal on August 29 last. Now the BB is approaching the central bank of China to enter an agreement to this effect.
The official, however, did not disclose the amount of money in forex to be invested in the Chinese bond. But he said the amount would be smaller in the first phase.
If the investment proves profitable, the BB could buy more Chinese bonds in the future, he said.
In the last fiscal year of 2011-12, the BB earned Tk 10.91 billion as returns on investments of its forex holding. The amount higher by 13 per cent than that of the previous fiscal year.
The income from foreign sources could be higher, if the BB diversified its investment in other foreign currencies or bonds, the BB official said.
From now on, the BB is planning to keep the forex reserve in diverse currencies to help avert any risk of incurring losses because of a fall in the dollar rate.
The weighted average interest rate of the investment in foreign currencies in 2012 and 2011 was 2.15 per cent and 1.78 per cent respectively. But the current yield of the Chinese government bond is about 3.5 per cent.
Taking this factor into consideration, the central bank decided to hold a chunk of foreign exchange reserves in the Chinese currency by buying the Chinese government bond, as it found that the yield was higher than that of any other government bonds, particularly in the US dollar, the BB official said.
The yield of the 10-year Chinese government bond during the period of 2005 to 2012 was, on an average, 3.6 per cent, reaching an all-time high of 4.6 per cent in July, 2008 and a record low of 2.7 per cent in January, 2009. During the last 12 months, the yield declined by 0.72 per cent. But it is still higher than that of any other foreign currency.
Apart from the traditional US dollar, the BB is planning to hold its forex reserves in Euro and British pounds also, as there have been fluctuations in the exchange rate of US dollar, for a considerable period of time.
"It is not the problem only in Bangladesh, but also in other countries. Now most central banks around the world are losing income from their foreign investments as the dollar rate is not stable. So every central bank has taken steps cautiously to protect their forex reserves against exchange rate volatility," the BB official mentioned.
However, the BB will move very cautiously so it does not face any risk instead of making some income.
The China Development Bank (CDB) issued three-year and 20-year offshore Renminbi-denominated bonds in Hong Kong (the so-called dim sum bond), with participation of Asian and non-Asian investors.
About 60 per cent of the total dim sum bonds were allocated to the European, Middle East and African investors. The allocation for African investors accounted for one fifth of the total bonds the CDB issued.
Internationalisation of the Chinese currency would lower transaction costs, provide better working capital and improve risk management practices, which along with various incentives, would also facilitate trade flows, the BB official said
Investments will also find support through cheaper sources of funding, which is raised in Hong Kong or through loans, and better-protected capital with hedging instruments. It would result in more favourable trade settlements between China and Bangladesh, he added.
Some other central banks already invested in Chinese bonds. The Bank of Indonesia (BI) and the People's Bank of China (PBoC) signed an agreement recently to enable the BI to invest in China's inter-bank bond market.
African central banks also invested in the Chinese bonds. The Standard Bank Group acted as sole book runner for the latest placement of CDB's RMB500 million worth of three-year offshore China Yuan Renminbi bonds to the African central banks.
The Japanese central bank also bought Chinese bonds worth $10 billion out of its forex holding. The move is significant since the country is known to hold most of its forex reserves in US treasuries and only a small part in euros.
Earlier in 2010, the BB had bought 10 tonnes of fresh gold from the International Monetary Fund (IMF) for protecting the value of the country's forex reserves when the dollar price was declining sharply.
The gold purchase helped the BB to gain some extra profit as the price of the precious metal soared over the last few years. It also helped to keep the forex reserve in a relatively more favourable position, the BB official stated.
