Thailand’s central bank aims to increase holdings of Chinese bonds and add overseas corporate debt to its $179 billion of foreign-exchange reserves as it seeks to boost returns.
“We fully invested the quota from the Chinese authorities and we feel that we need more diversification in our international reserves,” Bank of Thailand Deputy Governor Pongpen Ruengvirayudh said in an interview in Bangkok today. “Yuan yields are higher than in developed markets. This year will be the year we are investing more in new emerging-market assets.”
The Bank of Thailand currently has a 7 billion yuan ($1.1 billion) allocation for bond purchases and has a $300 million quota to buy onshore yuan debt under China’s Qualified Foreign Institutional Investor program, known as QFII. The monetary authority’s holdings of yuan-denominated notes are “very close” to the QFII limit, Pongpen said.
As record-low interest rates depress yields in developed countries, emerging-market bonds are attracting increasing inflows. China’s 10-year sovereign notes yield 3.57 percent, compared with 1.93 percent for similar-maturity U.S. Treasuries and 1.46 percent for German securities, according to data compiled by Bloomberg.
The central bank wants to support internationalization of the yuan and help the development of the Chinese market, Pongpen said, adding that it’s possible the bank will apply for an increase to its QFII quota again in the future.
Thailand’s foreign-exchange reserves stood at $179 billion in the week ended Feb. 22, near a record high of $183.6 billion in September, official data show. Funds invested in yuan assets aren’t classified as international reserves because the Chinese currency isn’t fully convertible.
The Bank of Thailand will also buy more assets from non- Asian emerging markets, including Eastern Europe and Latin America, which will help diversify risk and reduce volatility on returns, Pongpen said.
The deputy governor said policy makers have the tools in place to deal with capital inflows, which have contributed to the baht’s 2.9 percent advance against the dollar this year, the best performance in Asia.
Southeast Asia’s second-biggest economy has attracted a net $6.5 billion into local-currency debt this year from overseas investors, compared with $31 billion for the whole of 2012, according to Thai Bond Market Association data. That’s even after the government removed a 15 percent tax exclusion on income earned on the securities in October 2010.
“We always have it in our tool box,” Pongpen said, adding that the central bank isn’t yet considering any measures to curb inflows. “At this stage, we have seen quite balanced flows.”
The central bank has encouraged local entities to invest abroad and is expecting outflows to increase in 2013 from $12 billion last year, she said. Imports of machinery by local businesses has also helped to counter inflows “to some extent,” Pongpen said.
“If the exchange rate goes beyond the level that we think is appropriate for the country’s fundamentals, then the capital management tools will always be in our drawer,” she said. A stronger baht “is not always a bad thing,” Pongpen said.