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A global renminbi (RMB) 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 five percent of the 2014 global foreign reserves and facilitating a potential global Renminbi.
Disclaimer: The views expressed in this paper are those of the authors and do not necessarily reflect those of the Fung Global Institute. The authors are solely responsible for any errors or omissions.