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Institute for Economies in Transition, Bank of Finland BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland

No 1/2016:
Can the Chinese bond market facilitate a globalizing renminbi?

Guonan Ma () and Wang Yao ()

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 central 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 market 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.

Keywords: bond market; government bond market; renminbi internationalization; (follow links to similar papers)

JEL-Codes: E42; E44; E58; F02; G10; H63; (follow links to similar papers)

30 pages, February 6, 2016

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