The authors empirically characterize how China is internationalizing the Renminbi by selectively opening up its domestic bond market to foreign investors and propose a dynamic reputation model to explain this internationalization strategy. The Chinese government deliberately controlled the entry 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. Their framework explains these patterns as the result of a government strategy to build its reputation as an international currency issuer while attempting to reduce the cost of potential capital flight as it tries to gain credibility. The dynamics of reputation make Chinese debt a substitute for emerging market risky debt in the early stages of internationalization and more of a substitute for developed market safe debt in the later stages. The authors use their framework to explore how countries compete to become a reserve currency provider. Competition worsens the incentives to build up reputation by reducing the benefits of having a higher reputation. The framework is tractable and can make sense of both new entrants like China and established players like the United States.
About the Seminar Series
Financial market development goes hand-in-hand with economic growth. The development of China’s capital markets in terms of size, regulations, capability, and efficiency has been impressive. China may now even lead globally in some dimensions, notably e-payments systems. Yet, China’s capital markets are still a work-in-progress facing both generic and unique challenges. Other Asian capital markets have even greater uneven development. Some in advanced Asian economies have acquired globally acclaimed reputation and capabilities while various regulatory and structural weaknesses dwarf others. Corporations and investors have been inclined to arbitrage cross-border regulatory and developmental gaps; so the very uneven status of capital markets across Asia is a policy issue for the governments in the entire region and perhaps globally. Analyzing the positive and negative lessons in the functioning of Asia’s capital markets, and identifying reforms and applications of technology that could further improve Asian capital markets’ allocation efficiency, financial inclusion, and forewarning against reforms that might cause problems can benefit practitioners, policymakers and researchers, and can contribute significantly to overall prosperity.
The ABFER and the University of Chicago’s Becker Friedman Institute China (BFI-China), in collaboration with National University of Singapore (NUS) Business School, Shanghai Advanced Institute of Finance (SAIF), The Chinese University of Hong Kong (CUHK) Department of Economics, CUHK-Shenzhen and Tsinghua University PBC School of Finance (Tsinghua PBCSF), hope to provide a virtual network to benefit researchers, policymakers, and practitioners from Asia and beyond.
All times are listed in China Standard Time.
Thursday, September 15, 2022
Internationalizing Like China
Jesse Schreger, Class of 1967 Associate Professor of Business, Economics Division, Columbia Business School
Discussant: Zhiguo He, Fuji Bank and Heller Professor of Finance and Jeuck Faculty Fellow, Booth School of Business, and Senior Fellow, ABFER
Session Chair: Michael Song, Wei Lun Professor of Economics and Head, Department of Economics, Chinese University of Hong Kong and Senior Fellow, ABFER