Benn Steil


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Can China’s Bond Market Support a Global RMB?

by Benn Steil and Dinah Walker
May 21, 2013


On April 24, the Australian central bank announced that it would raise the proportion of its reserves devoted to Chinese financial assets from 0% to 5%, likely among the highest such allocations among world central banks.  Will other major central banks follow suit?

It has been widely argued that the Chinese financial markets are too shallow to support such a move and that prospects for rapid internationalization of China’s currency, the RMB, are therefore limited.  But let’s look at the numbers.

According to the IMF, the world holds the equivalent of $10,936 billion in foreign exchange reserves, and $3,442 billion of this is held by China.  That leaves $7,494 billion in reserves for the rest of the world.  If the rest of the world were to invest 5% of its reserves in RMB-denominated assets, that would represent $375 billion worth.  This would make the RMB the world’s third leading reserve currency (well behind the euro, and just ahead of the yen and pound sterling).

According to the Bank for International Settlements, China has the equivalent of $1,248 billion in domestic general government debt outstanding.  So if the rest of the world plowed $375 billion into the Chinese government bond market, foreign official institutions would own about 30% of it.  Is that a lot?

Not compared to what foreign official institutions own of the U.S. government bond market, which is 36%.

Note too that the Chinese government bond market has been growing rapidly; it is nearly 50% larger than it was in 2010.

It remains difficult for foreigners to invest in China owing to government restrictions.  Yet if the Chinese government were to open the doors to foreign central bank investment, its markets could accommodate 5% of world reserves and still have them be less dominated by foreign official institutions than those of the United States.

Beijing Symposium Papers: The Future of the International Monetary System and the Role of the Renminbi
Prasad and Ye: Will the Renminbi Rule?
U.S. Treasury: Major Foreign Holders of Treasury Securities
BIS: Statistical Annex


Follow Benn on Twitter: @BennSteil

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