Currency Flowback and Opening Up Bond Markets

Abstract

The internationalization of the Renminbi (RMB) has become a practical reality in global financial markets and economic dynamics. Understanding the mechanism of currency flowback, the movement of the RMB back to China’s domestic financial system after being utilized abroad, is crucial in comprehending the evolving landscape of global finance and China’s position within it. This article investigates the relationship between currency flowback and RMB internationalization through theoretical frameworks, empirical evidence, and model simulations. The opening of bond markets plays a pivotal role in facilitating currency flowback and promoting RMB internationalization by attracting foreign investors and increasing the liquidity of domestic bond markets. A Dynamic Stochastic General Equilibrium (DSGE) model incorporating bond market opening-up illustrates the potential for improved financial stability and economic resilience. However, the conclusions drawn from simulations are contingent on maintaining a moderate foreign holding ratio of domestic bonds to mitigate risks associated with excessive foreign ownership.