Internationalizing Like China / Christopher Clayton, Amanda Dos Santos, Matteo Maggiori, Jesse Schreger.

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Clayton, Christopher

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w30336.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We 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. Our 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. We use our 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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w30336 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w30333 Noisy Foresight /	nber w30334 Superiority-Seeking and the Preference for Exclusion /	nber w30335 Lessons from U.S.-China Trade Relations /	nber w30336 Internationalizing Like China /	nber w30337 The Macroeconomic Consequences of Natural Rate Shocks: An Empirical Investigation /	nber w30338 Climate Change Around the World /	nber w30339 The Benefits and Costs of U.S. Employer COVID-19 Vaccine Mandates /	Next

August 2022.

We 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. Our 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. We use our 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.