Can The Chinese Bond Market Facilitate A Globalizing Renminbi?

Guonan Ma and Yao Wang
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Yao Wang: Fung Business Intelligence Centre

No GRU_2016_011, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

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 overcome 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: Renminbi internationalization; global currency; disintermediation; Chinese bond market; bond market liquidity; reserve requirement; public sector liabilities; and foreign ownership (search for similar items in EconPapers)
Pages: 29 pages
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