The Impact Of Bond Market Size On Currency Internationalization

In recent years,with the development of the financial market reforms in China and RMB being included in the SDR basket,the process of RMB internationalization has reached a critical turning point.More and more scholars realized that,although China have satisfied the macroeconomic and trade conditions for the RMB internationalization,and even China is ongoing the financial markets reform,China's financial market,especially the bond market is still at a relatively backward stage,which is a major obstacle of the further RMB internationalization.Therefore,this article is designed to study the effect of the size of the bond market to the currency internationalization from the point of the combination of theoretical and empirical perspective,actuality and internationalization mode.The objects of study are the four kinds of currency which was included in SDR basket earlier than RMB.That is euro,dollar,yen and sterling.Firstly,after the overview of theoretical and empirical literature,on the basis of the monetary search theory,the exchange structure theory and the externalities theory of international currency,this article deduces three potential theoretical mechanisms of the bond market size to the currency internationalization to providing the theoretical foundation of the later empirical model.Meanwhile,in this part three common theoretical determinants of the currency internationalization are also chosen.Then,by analyzing proportions of these four kinds of currency in international currency reserves and the development situation of domestic and international bond markets,it finds that the countries of these four kinds of currency issue all have a huge bond market.In contrast,the size of the bond market in China,especially the size of the international bond market is still far behind the country's economy.After that,this article analysis of the history internationalization model of these four kinds of currency to show the highly positive correlation between the size of the bond market and the currency internationalization.According to the the analysis of the above,the proportions of these four kinds of currency in international currency reserves are chosen to measure the internationalization of the currency.the ratios of the domestic bond market scale to GDP and the international bond market scale to GDP are chosen as the target independent variables.In addition,the economies of scale,trade openness and monetary inertia are selected as control variables.Using all variables chosen above,a static balance panel model is set up.Then based on the selected most appropriate panel model fixed-effect model by Breusch-Pagan test and Hausman test,the results show that both the size of the domestic bond market and that of the international bond market have a significant effect on the currency internationalization.Meanwhile,the effect of the international bond market on monetary internationalization is obviously larger than that of the domestic bond market,which is about two times of the latter.Besides,the results also show that the economies of scale,trade openness and monetary inertia are all significant determinants of monetary internationalization.Among them,the trade openness plays the most important role.Lastly,combined with the stage of the RMB internationalization and the current situation of the bond market in China,several suggestions to promote the internationalization of the RMB are given based on the study in the article.