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Internationalizing Like China

Author

Listed:
  • Clayton, Christopher
  • Santos, Amanda Dos
  • Maggiori, Matteo
  • Schreger, Jesse
Abstract
We empirically characterize how China is internationalizing the Renminbi by selectively opening up its domestic bond market and propose a dynamic reputation model to understand China's internationalization strategy. While previously closed to foreign investors, China has recently allowed major increases in foreign investment in its domestic bond market. China carefully controlled the entrance of foreign investors into its market, first allowing in relatively stable long-term investors like central banks before allowing in flightier investors like mutual funds. Foreign investors increasingly treat Renminbi denominated assets as a substitute for safe developed-market government bonds. Our framework explains these patterns as the result of a government strategy to build its reputation as an international currency issuer while minimizing the cost of potential capital flight as it gains credibility. We analyze optimal two-way liberalization: gradually letting more domestic capital flow abroad as foreigners increase their participation in domestic markets.

Suggested Citation

  • Clayton, Christopher & Santos, Amanda Dos & Maggiori, Matteo & Schreger, Jesse, 2022. "Internationalizing Like China," SocArXiv r2msa, Center for Open Science.
    • Handle: RePEc:osf:socarx:r2msa
    DOI: 10.31219/osf.io/r2msa
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    Cited by:

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    2. Colin Weiss, 2022. "Geopolitics and the U.S. Dollar's Future as a Reserve Currency," International Finance Discussion Papers 1359, Board of Governors of the Federal Reserve System (U.S.).
    3. Gerding, Felix & Hartley, Jonathan S., 2024. "De-dollarization? Not so fast," Economics Letters, Elsevier, vol. 238(C).
    4. Juan J. Cortina & Maria Soledad Martinez Peria & Sergio L. Schmukler & Jasmine Xiao, 2024. "The Internationalization of China’s Equity Markets," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 554-610, June.

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance

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