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  5. China and U.S. In the International Monetary System
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China and U.S. In the International Monetary System

Paper Session

Sunday, Jan. 8, 2023 1:00 PM - 3:00 PM (CST)

Hilton Riverside, Grand Salon D Sec 19 & 22
View Webcast
Hosted By: American Economic Association
  • Chair: Carmen M. Reinhart, Harvard University and World Bank

Internationalizing Like China

Amanda Dos Santos
,
Columbia University
Christopher Clayton
,
Yale University
Matteo Maggiori
,
Stanford University
Jesse Schreger
,
Columbia University

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.

The Macroeconomic Implications of US Market Power in Safe Assets

Jason Choi
,
University of Wisconsin-Madison
Rishabh Kirpalani
,
University of Wisconsin-Madison
Diego Perez
,
New York University

Abstract

We measure the degree of market power associated with the issuance of US public debt and explore its international macroeconomic consequences. We develop a
model of the global economy in which US debt has a non-pecuniary value, and estimate US market power in the supply of safe assets through the lens of the model.
The monopoly equilibrium is associated with a scarce supply of US debt and a convenience yield that reflects both this non-pecuniary value as well as a markup. We show
that the degree of market power and the distortions introduced as a consequence of
it are directly linked to the elasticity of demand of US debt. Motivated by this prediction, we estimate this elasticity in the data. We exploit variations in the supply
of US Treasuries by using multiple instruments that are unrelated to changes in demand, and document a fairly inelastic demand for US debt. This estimate allows us
to decompose the convenience yield, with roughly two thirds of it accounted for by
monopoly rents and one third accounted for by the non-pecuniary value. US market
power in the issuance of such assets leads to significant under-provision of safe assets. We also show that this market power has been decreasing over time, which can
partially account for the deterioration in the US net foreign asset position.

Homemade Foreign Trading

Zhiguo He
,
University of Chicago
Yuehan Wang
,
Central University of Finance and Economics
Xiaoquan Zhu
,
University of International Business and Economics

Abstract

Using cross-border holding data from all custodians in China’s Stock Connect, we provide systematic evidence that Chinese mainland insiders tend to evade the see-through surveillance by round-tripping via the Stock Connect program. We find that after the regulatory reform of Northbound Investor Identification in later 2018, the homemade foreign trading showed a sign of decay while the intensity of insider trading in the mainland market reverted to its previous level following a decrease after the launch of the Stock Connect. As the correlation between insider trading and northbound flows decreased after the policy shock, so does the return predictability of cross-border flows, especially among less prestigious foreign custodians, cross-operating mainland custodians and non-A-listed custodians in which mainland investors are more likely to hide. The analysis sheds light on the role of regulatory cooperation over capital market integration.

China as a Lender of Last Resort

Sebastian Horn
,
Kiel Institute
Brad Parks
,
College of William & Mary
Carmen M. Reinhart
,
Harvard University and World Bank
Christoph Trebesch
,
Kiel Institute

Abstract

This paper documents China’s rapidly expanding system for cross-border support lending to sovereigns in distress, which is tailored to countries that have borrowed from Chinese banks as part of the Belt and Road Initiative. China’s role as a lender of last resort is not widely understood because, like most of its its overseas lending, it is shrouded in secrecy. To shed light on this phenomenon, we collect extensive data on the sovereign lending activities of the People’s Bank of China (PBOC) and China Development Bank (CDB). We find that, over the past 10 years, the Chinese state has started to support countries in distress using a combination of short-term and longer-term loans. The PBOC offers short-term liquidity support through its Central Bank Swap Line Network, which now extends to approximately 50 developing, emerging market, and advanced economies. Borrower drawdowns on these currency swap facilities are more frequent and substantial than is widely assumed; nearly two dozen countries have recently made use of them. We show how swap line usage is often coupled with longer-term loans from China Development Bank and other Chinese state-owned banks to facilitate the repayment of existing loans, akin to the usage of IMF bailout funds. China’s “hidden bailouts” are a challenge for macro surveillance efforts in times of crisis because debtor countries do not often disclose the timing and amounts of this kind of rescue lending. These practices can inflate central bank reserves. We highlight that interest rates on Chinese bailout funds are high compared to those of the IMF or World Bank loans. Our findings show the importance of understanding China’s role in global finance both in tranquil and crisis times. China’s brand of international rescue lending may develop into a parallel system to established multilateral and regional rescue facilities.

Discussant(s)
Ricardo Reis
,
London School of Economics
Kenneth Rogoff
,
Harvard University
Antonio Coppola
,
Stanford University
Wenxin Du
,
University of Chicago
JEL Classifications
  • F3 - International Finance
  • G1 - Asset Markets and Pricing