China & World Economy / 1–18, Vol. 23, No. 4, 2015
Transforming Central Bank Liabilities into
Government Debt: The Case of China
Robert McCauley, Guonan Ma*
Abstract
Where policy has substantially increased central bank assets, the corresponding liabilities present an opportunity to increase the breadth, depth and liquidity of the government bond market. In China’s case, transformed illiquid central bank liabilities could double or triple the stock of government bonds. Central bank liabilities can be transformed into government bonds either through the government’s purchase of foreign exchange reserves held by the central bank or by the government overfunding its borrowing requirement and depositing the proceeds in the central bank. The overfunding approach is preferred if, for financial stability reasons, it is judged prudent to leave the central bank with sufficient resources to serve itself as lender of last resort in foreign currency to the banking system. In the case of China, public debt consolidation could also contribute to further liberalizing the Chinese banking system, wider international use of the renminbi and more balanced holdings of key currency government bonds.
Key words: debt management, foreign exchange reserves, government bond market, renminbi internationalization
JEL codes: E44, E58, H63