The establishment of a more robust base money supply mechanism has become a general consensus under the new development paradigm. Drawing from domestic and international experience, promoting the use of government bonds as an anchor for the Renminbi requires building a government bond market characterized by "sufficient scale, strong liquidity, optimal structure, stable openness, and a solid foundation." Additionally, it necessitates deeply linking the Renminbi, through government bonds, with China's new economic growth engines as a forward direction.
Since early 2024, the People's Bank of China has actively promoted the inclusion of central bank trading of government bonds in the secondary market into its monetary policy toolkit, sparking widespread discussion on the issue of changing the Renminbi's anchor. In fact, discussions about altering the Renminbi's anchor have existed in both industry and academia for some time. The mature practical experience of developed countries like the United States provides some theoretical basis for promoting government bonds as a new anchor for the Renminbi. However, a consensus has not yet been reached regarding the validity, necessity, and feasibility of implementing such theories in China.
This analysis focuses on the evolution of the Renminbi's anchor and the underlying fundamental reasons for these changes. It particularly references U.S. practical experience, examining the functional evolution of U.S. Treasury bonds during the internationalization of the U.S. dollar. The analysis dissects the background, specific pathways, supporting mechanisms, and actual effects of the U.S. using Treasury bonds as a dollar anchor, aiming to provide insights for further advancing the internationalization of the Renminbi and the development of China's government bond market.
A currency's anchor is the foundation for its issuance and value maintenance. In the era of credit-based standards, anchors can be broadly categorized into internal anchors and external anchors. An internal anchor pegs the currency's value to the intrinsic value of the economy, while an external anchor links the local currency's value to other assets like foreign exchange.
Since the People's Bank of China was authorized to perform the functions of the national central bank in 1984, the Renminbi issuance mechanism and its corresponding anchor have undergone two major shifts, reflecting China's economic development and transformation since the reform and opening-up. The current discussion about changing the Renminbi's anchor stems from the objective requirements for China's economic re-transformation under the new development paradigm.
The first shift in the Renminbi's anchor reflected China's integration into the international cycle after reform and opening-up. In the early stages, when China's interdependence with the international community was relatively low, Renminbi issuance was primarily based on re-lending and fiscal overdrafts. After China joined the World Trade Organization in 2001 and began deeply participating in international division of labor, it rapidly became the world's largest trading nation. Under the compulsory foreign exchange settlement system, the PBOC was required to passively issue Renminbi to purchase the vast amount of U.S. dollar foreign exchange resulting from the balance of payments surplus. The Renminbi's anchor shifted "from internal to external," with the proportion of central bank foreign exchange purchases continuously rising, once exceeding 80% of the total assets of the monetary authority, becoming the primary money supply mechanism during that period.
Pegging the Renminbi to foreign exchange had certain rationality in the early 21st century. Internally, during this export-oriented period, the growth of foreign exchange reserves could reasonably reflect national economic growth, with money supply matching GDP growth rates. The value of the Renminbi was effectively pegged to China's strong export growth and productivity gains through the foreign exchange anchor. Externally, globalization was still advancing, the value of the U.S. dollar remained relatively stable, and both political and market risks were relatively low.
However, this model also had significant drawbacks. Firstly, passive money issuance considerably impacted the independence of China's central bank policy. When foreign exchange reserve growth was too rapid, the central bank needed to employ other measures to regulate market liquidity and avoid inflation. Secondly, the model was heavily reliant on stable external factors, particularly the massive holdings of U.S. dollar reserves, making China highly vulnerable to external market and political risks. Finally, as China's economy continued to grow, industrial upgrading became an inevitable trend. International experience from countries like Japan showed that transformation and upgrading face immense internal and external pressures, making sustained trade surpluses difficult to maintain.
Following the financial crisis, China's development pattern, reliant on both external markets and resources, suffered significant external shocks, making a change in the Renminbi's anchor urgent. On one hand, U.S. quantitative easing led to excessive dollar issuance, and China effectively paid substantial seigniorage to the U.S. for its large dollar reserves. On the other hand, the global economic recession and hindered globalization process altered China's balance of payments pattern, leading to a declining trend in foreign exchange purchases. Starting around 2014, the PBOC began supplying base money through monetary policy tools such as targeted reserve requirement ratio cuts, Standing Lending Facility, and Medium-term Lending Facility. Although foreign exchange purchases still accounted for a high proportion post-2008, they gradually stabilized, while the scale and proportion of claims on other depository corporations began to expand. The Renminbi issuance mechanism shifted from being anchored to foreign exchange towards being anchored to credit.
Influenced by "land finance," China's real estate sector became a major driver of credit expansion during this period, with the Renminbi's value indirectly pegged to Chinese real estate. The real estate sector played a crucial role in this credit expansion, especially after regulatory easing in late 2014. The proportion of new real estate loans in the total new Renminbi loans of financial institutions surged, reaching up to 60%, and household leverage ratios also increased sharply.
Objectively, the real estate sector served as a core credit collateral and money creation engine during this period, which also had its rationale. As a "mother industry" with extensive upstream and downstream industrial chains, real estate held a pivotal position in the Chinese economy. Particularly after the financial crisis, as domestic demand replaced external demand as the main economic growth driver, the Renminbi became linked to China's economic growth by indirectly anchoring to the real estate sector.
Against the backdrop of an aging population and slowing urbanization, the growth of the real estate sector gradually lost fundamental support, rendering the above anchoring mechanism ineffective. As the Chinese government began actively regulating the real estate market in 2021 to prevent systemic risks seen in the U.S. and Japan, the sector entered a downturn phase. Its role in the Chinese economy shifted from being a pillar to a drag, and already high household leverage ratios could no longer support further credit expansion.
As China's economy enters a new development stage, the issue of changing the Renminbi's anchor is back on the agenda. On one hand, the international situation is increasingly complex, with rising trade protectionism, extraterritorial jurisdiction, and abuse of financial sanctions posing external risks, keeping external demand highly volatile. On the other hand, entering the high-quality development stage, China's economy is undergoing a painful period of transformation and upgrading. The real estate sector, representing traditional domestic demand, is undergoing adjustment, while the government sector is gradually replacing the corporate and household sectors as the main driver of credit expansion. Consequently, discussions about the feasibility of using government bonds as an anchor have begun to emerge.
The concept of pegging the Renminbi to government bonds involves the PBOC purchasing government bonds in the secondary market as one channel for base money issuance. Proponents argue that this could enhance the autonomy and effectiveness of monetary policy, aid Renminbi internationalization, and allow coordination between central bank bond purchases and fiscal policy to stabilize the economic foundation. Opponents contend that, besides technical limitations and legal obstacles, pegging the currency to government bonds could create moral hazard, lead to excessive national debt, weaken monetary credibility, and be detrimental to currency internationalization. In practice, the Federal Reserve's long-term use of Treasury bond purchases for quantitative easing is seen by proponents as strong evidence for bonds as a monetary policy tool, while opponents view it as the root cause of uncontrolled U.S. debt levels and long-term inflationary pressures.
In the early United States, Treasury issuance was viewed more as a fiscal tool. After the collapse of the Bretton Woods system, Treasury bonds became the core vehicle for the global circulation of the U.S. dollar, playing a vital role in supporting its global currency status. In recent years, the Federal Reserve's continued expansion of dollar liquidity supply has weakened its link to oil, making U.S. Treasury bonds the de facto anchor.
After the collapse of the Bretton Woods system in 1971, which formally decoupled the U.S. dollar from gold, the U.S. urgently needed to find a new backing for the dollar as a global currency. Oil became the primary target. In 1974, the U.S. reached an agreement with Saudi Arabia whereby Saudi Arabia accepted U.S. dollars as the sole pricing currency for its oil exports. The U.S. subsequently reached similar agreements with other OPEC members, successfully pegging the dollar to oil and maintaining its international status.
The stable operation of the petrodollar system required effective channels for dollar reflux. Under the market order where the dollar was the settlement currency for oil trade, oil-exporting countries maintained long-term trade surpluses. The 1973 oil crisis, in particular, multiplied oil prices, leading to the accumulation of vast petrodollar reserves. To maintain dollar stability, the U.S. Treasury Department prioritized the petrodollar issue, actively promoting dollar reflux through measures like establishing a "Joint Economic Commission" with Saudi Arabia. Ultimately, the medium- and long-term Treasury bond market was chosen as the reflux channel, establishing the closed-loop foundation for the dollar's extraterritorial circulation as a major global currency.
The selection of medium- and long-term bonds was generally based on several considerations. Firstly, they offered both safety and returns, and compared to Treasury bills, had sufficient market depth to meet the long-term reserve needs of sovereign institutions. Secondly, they could address sovereign financing needs for U.S. expansionary fiscal policy. Thirdly, they could help manage the liquidity absorption required by expansionary monetary policy, avoiding domestic inflationary pressures.
Initially, with low openness of the U.S. Treasury market, transnational political cooperation led by the U.S. government was the main driving factor. The "Foreign add-on" special issuance model, pioneered by the U.S. Treasury for Saudi Arabia, is a typical marker of this market opening.
The "Foreign add-on" system was a transitional arrangement to facilitate foreign central banks' participation in the primary U.S. Treasury market. Starting in June 1974, under a bilateral economic cooperation framework, the U.S. and Saudi Arabia introduced this system for medium- and long-term Treasuries. Based on the competitive auction system of the time, it aimed to gradually introduce foreign central banks into the primary market while ensuring its stability. The U.S. government wanted to guide foreign central banks into participating in bond issuance, but feared that their large purchase volumes could significantly disrupt auction rates, adversely affecting monetary policy transmission and market stability. Therefore, a special market segment between primary and secondary markets was created, allowing foreign central banks to purchase Treasuries定向ally at the average auction price, beyond the announced issuance amount, minimizing impact on the existing market. This system was extended to all OPEC countries in 1975 and to all foreign central banks in 1979. As the medium- and long-term bond market's openness matured, the "Foreign add-on" system gradually phased out.
Overall, by binding the dollar to oil, a fundamental fuel and industrial原料 of modern society, the U.S. successfully linked it to global economic growth, thereby solidifying the dollar's international hegemony, with Treasury bonds playing a crucial role as a value carrier.
Lacking constraints, the U.S. dollar hegemony system inherently carries the moral hazard of excessive Treasury issuance. Over time, oil and the dollar have gradually shown signs of decoupling. From the perspective of the dollar's money creation mechanism, the Federal Reserve implements monetary policy to adjust the money supply, partly through open market operations involving the purchase of U.S. Treasuries. When the Fed buys Treasuries, base money is supplied, increasing the money supply. Under this mechanism, the Treasury market is tightly linked to the dollar money supply. During economic crises, issuing excess Treasuries provides the U.S. government with ample funds for public expenditure and fiscal deficit financing. Furthermore, against the backdrop of dollar internationalization, strong global demand for dollars provides a market capacity to absorb excess U.S. debt, somewhat reducing market constraints and reinforcing the tendency to oversupply Treasuries.
In practice, facing the major shocks of the 2008 financial crisis and the 2020 pandemic, the U.S. massively issued excess Treasuries to stimulate the economy, with the Fed purchasing them in the secondary market for quantitative easing, effectively collecting seigniorage globally. Research indicates that in recent years, the U.S. dollar index and oil prices have shown a decoupling trend, suggesting the dollar's anchor has gradually shifted from oil to U.S. Treasury bonds.
In the short term, using Treasuries as an anchor helped the U.S. economy recover quickly from both crises. In the medium to long term, however, it has shaken the foundation of dollar hegemony. Domestically, rapid expansion of the national debt and base money supply created significant inflationary pressures. Although the Fed began a rate-hiking cycle in 2020, factors including U.S.-China decoupling led to Consumer Price Index frequently exceeding expectations, keeping inflation high. Rising interest rates also increased the U.S. government's interest expenses, putting the Fed in a dilemma between curbing inflation and alleviating fiscal pressure. Internationally, the expanding debt scale and frequent debt ceiling crises have intensified international investors' concerns about U.S. Treasury credit risk. Frequent use of dollar hegemony for extraterritorial jurisdiction has further fueled de-dollarization trends.
Japan's experience demonstrates the impact of solely relying on government bonds as an anchor on currency internationalization. In 1999, Japan's Ministry of Finance issued guidelines marking the official prioritization of yen internationalization. However, following the burst of the economic bubble in the 1990s, the Japanese government, facing prolonged low growth and deflation, adopted expansionary fiscal policies and heavily used unconventional monetary policies like quantitative easing and yield curve control. The Bank of Japan became the largest holder of Japanese government bonds, the yen remained persistently weak, and it lacked a foundation for further internationalization.
Lessons from the U.S. and Japan indicate that the core of a fiat currency lies in national credit. Central bank purchases of government bonds are a channel for base money issuance, not the essence. The key to maintaining or enhancing a currency's international status is whether national credit is combined with actual economic growth through government bonds. Whether the Renminbi's future "anchor" shifts to government bonds will depend more on the progress of China's economic structural transformation and global monetary system reforms, rather than merely on adjustments to a single policy tool.
For the next phase of government bond market development, recommendations are proposed from both technical and strategic perspectives.
From a technical standpoint, the current government bond market still has room for improvement as a channel for Renminbi issuance. The market depth is relatively limited. Frequent central bank buying and selling of bonds to adjust liquidity could cause significant market volatility. Furthermore, against the backdrop of "asset shortage," supply-demand imbalances in government bonds have led to persistently low yields on 10-year bonds, narrowing the central bank's policy implementation space and forcing it to temporarily halt bond purchases to stabilize market expectations.
To further enhance bond market liquidity, improve the base money supply mechanism, and健全 the benchmark and market-based interest rate system, the government bond market should systematically evolve towards being "sufficiently large in scale, strong in liquidity, optimal in structure, stable in openness, and solid in foundation." This aims to foster a modern financial system in China driven by domestic credit, with precise and effective price signals, a deep and attractive asset pool, and resilience against external shocks, thereby providing solid, stable, and efficient financial support for the new dual-circulation development paradigm.
Specific recommendations include: Firstly, appropriately expanding the scale of the government bond market, increasing the supply of high-quality Renminbi assets, strengthening fiscal-monetary policy coordination, and aiding macroeconomic regulation and market liquidity management. Secondly, optimizing the secondary market operating mechanism, such as by establishing market maker systems to enhance market efficiency. Thirdly, further optimizing and improving the structure of government bonds, particularly by increasing the supply of short-term bonds to avoid yield curve inversion. Fourthly, further promoting the opening up of the government bond market, diversifying the types of institutional investors to prevent one-sided market trends caused by homogeneous investor categories and strategies. Fifthly, orderly promoting the development of the government bond futures market to facilitate risk management and the coordinated development of futures and spot markets. Sixthly, strengthening the construction of a self-controlled, secure, and efficient financial infrastructure system, adhering to a direct holding and穿透 regulation account custody system, and balancing security with development.
Currently, China's economy is gradually shifting from being driven by real estate to being driven by high technology. Renminbi issuance should be closely linked, through government bonds, to the development of new quality productive forces.
In the medium to long term, the government bond market must first enhance its support services in areas such as inclusive finance for small and micro enterprises, technological innovation, green and low-carbon development, rural revitalization, the elderly care industry, and the digital economy. It should contribute to key strategic priorities and actively foster new quality productive forces. Secondly, it should benchmark against international high-standard rules,结合 China's realities, to further improve relevant institutional arrangements. This involves building a financial market system with a unified back-end对接 diversified front-ends, fully leveraging the government bond market's role as the foundational, core, and benchmark pricing market of the modern financial system. Finally, it should expand institutional opening, reasonably absorbing international practical experience while summarizing successful domestic bond market paradigms and experiences. This will deepen institutional and mechanistic reforms within the government bond market, promote its high-quality development, and provide strong support for building China into a financial powerhouse.