Indonesia’s central bank is set to buy Chinese bonds by the end of the year, helping to diversify its holdings of foreign reserves and cushion the archipelago from external shocks to its financial system.
The planned purchase would mark Bank Indonesia’s first-ever move to buy China’s interbank bonds, said Hartadi A. Sarwono, a deputy governor for research and monetary policy at the central bank.
Indonesia is among few countries in Asia, including Malaysia, Thailand and Singapore, that have signed a bilateral swap agreement with China, allowing the purchase of Chinese bonds.
China and Indonesia agreed in March 2009 on a 100 billion yuan ($16 billion) currency swap agreement, a move back then that was viewed as a measure to help buffer their respective currencies against financial shocks following the collapse of Lehman Brothers Holdings in 2008. Indonesia also signed in 2009 currency swap agreements with Japan and South Korea.
“This would be our first time holding it, and China gives this privilege to a country with a bilateral currency swap agreement,” Hartadi told the Jakarta Globe in a text message on Wednesday.
Hartadi said that the purchase of interbank notes will be done after the central bank completes its administrative procedures and market assessment. Markets assessment aims to evaluate the costs and benefits of investing in such an instrument.
“In the fastest possible time frame, it will be done before the end of the year. The purchase will offer [Bank Indonesia] good coupons as bonds of comparable maturities are falling,” Hartadi said, without providing details on the terms of the notes purchase.
Indonesia’s central bank is known to have invested the bulk of its foreign reserves in US Treasuries. The remainder is in gold and other currencies such as the euro and the yen.
“I could not tell you the precise portion of USD on our foreign exchange reserve but it is roughly above 50 percent,” Hartadi said.
Several economists in Jakarta viewed Bank Indonesia’s recent strategy as a prudent plan to diversify investment risk.
“The move is meant to mitigate risk and the return [on China's bonds] offers better yields than notes of comparable maturities,” David E. Sumual, chief economist at Bank Central Asia, said in Jakarta.
The yield on China’s 10-year notes was 3.291 percent as of Thursday, compared to US 10-year notes’ yield of 1.418 percent. That compared with the 6 percent yield of similar maturity notes in Indonesia, according to data from Bloomberg.
Other central banks across the region have taken similar steps in purchasing Chinese notes, as they, too, try to safeguard their financial system from sudden shocks.
The Bank of Korea began purchasing Chinese notes on April 24 and has a quota from regulators to invest 20 billion yuan ($3.1 billion) with no deadline for completing it, Bloomberg reported on Tuesday.
Indonesia’s foreign reserves reached a record $125 billion in September 2011 – more than double the $51 billion in reserves at the end of 2008 – but it has since declined because it had to settle overseas debt and meet demand for investors repatriating funds abroad. It had also spent dollars to defend the rupiah, as overseas investors flocked to so-called safe-haven assets such as US bonds in the wake of Greece needing additional bailout funds.
Indonesia’s international reserves declined by $5 billion, the most since October last year, to $107 billion in June from May, according to central bank data. By comparison, China’s foreign-exchange reserves stood at $3.24 trillion as of June, while Japan has $1.196 trillion.
Destry Damayanti, chief economist at Bank Mandiri, said that Bank Indonesia has made the right move to anticipate a possible global slowdown.
Slowing economic growth in the United States and China and the possibility of Europe’s debt crisis deepening further has put Bank Indonesia and central banks across Asia on guard.
In the aftermath of Lehman Brothers’ collapse in 2008, Indonesian financial regulators spent Rp 6.7 trillion ($710 million) to bail out Bank Century, now called Bank Mutiara.
Even though Hartadi would not disclose the size of the central bank’s intended purchases of Chinese bonds, economists such as Destry and Sumual said that the amount would be small.
“This is a good move. It’s not placed in one basket,” Destry said, referring to Bank Indonesia’s diversified investment strategy. “China is a big country, and its currency has been relatively strong and stable.”
China, the world’s second-biggest economy, is Indonesia’s largest trading partner, and trade between the two nations remains strong. Non-oil and gas trade between the two countries was valued at $20.8 billion in the January-May period, up 25 percent from the same five months last year, according to data from the Central Statistics Agency (BPS).
Hartadi wouldn’t say whether Bank Indonesia would try to match the record reserves it had set last year.
The central bank had been spending hundreds of millions of dollars in separate instances since September last year to protect the rupiah from depreciating sharply against the dollar.
The rupiah was trading at 9,493 against the dollar on Thursday. It has lost 4.5 percent against the dollar so far this year, making it the second worst-performing currency in Asia after the Indian rupee, according to Bloomberg.
Meanwhile China’s yuan has fallen 1.3 percent against the dollar this year, making it the fourth-worst performing currency.
The Indonesian government forecasts its economy growing 6.2 percent this year.