Can the Chinese domestic bond and stock markets facilitate a globalising renminbi?

Abstract

A global renminbi (RMB) needs to be backed by a large, deep and liquid RMB market with a world-class Chinese government bond (CGB) market as its core. It also needs the support from a bigger and more open domestic stock market. China’s CGB market is the sixth largest local currency sovereign bond market in the world. By transforming the non-tradable, captive central bank liabilities into homogeneous and tradable CGBs through cutting the still high Chinese reserve requirements by 1/3, the size of the CGB market can rise by 40%, boosting market liquidity while trimming distortions to the banking system. Also, policy bank bonds may attract foreign investor demand. Finally, a bigger and more open domestic A-share stock market also helps expand the RMB assets in the international investor portfolio. With both bigger bond and stock markets and their higher foreign ownerships following market opening, the combined sum of Chinese domestic bonds and A-shares held by foreign investors may increase five folds during 2018–2025, lifting the RMB asset position in global investor portfolios, facilitating a potential global RMB, while promoting a deeper and more efficient Chinese domestic capital market. This process of liberalising cross-border portfolio capital flows for non-resident investors may bring both risks and benefits to the Chinese economy.