Can the Chinese bond market facilitate a globalizing renminbi?

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Title: Can the Chinese bond market facilitate a globalizing renminbi?
Author: Ma, Guonan ; Yao, Wang
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 1/2016
Year of publication: 2016
Publication date: 6.2.2016
Pages: 30
Subject (yso): obligaatiot; valuuttapolitiikka; valuuttavaranto; globalisaatio; valuutta; keskuspankit
Keywords: Bofit-kokoelma; Kiina
JEL: F02; E42; E44; E58; G10; H63
Other keywords: bond market; government bond market; renminbi internationalization
Abstract: A global renminbi needs to be backed by a large, deep and liquid renminbi bond market with a world-class Chinese government bond (CGB) market as its core. China’s CGB market is the seventh largest in the world while sitting alongside a huge but non-tradable and captive central bank liability in the form of required reserves. By transforming the non-tradable cen-tral bank liabilities into homogeneous and tradable CGBs through halving the high Chinese reserve requirements, the size of the CGB market can easily double. This would help over-come some market impediments and elevate the CGBs to a top three government bond mar-ket globally, boosting market liquidity while trimming distortions to the banking system. With a foreign ownership similar to that of the JGBs, CGBs held by foreign investors may increase ten-fold by 2020, approaching 5 percent of the 2014 global foreign reserves and facilitating a potential global renminbi, especially in the wake of the renminbi’s inclusion into the basket of the IMF Special Drawing Rights.

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