vitas vasiliauskas : the experience of the bank of lithuania in investing in china ’ s bond markets speech by mr vitas vasiliauskas, chairman of the board of the bank of lithuania, at the global summit on “ reserves management : navigating volatilities and the frontiers of innovation ”, beijing, 9 december 2019. * * * good afternoon, ladies and gentlemen, it ’ s my pleasure to join you today. in terms of investing in china ’ s bond markets, the bank of lithuania has been one of the pioneers among the central banks in europe and beyond. we have also recently become the managers of the ecb ’ s renminbi portfolio. i suspect this is the main reason why i was invited to this summit. therefore, i do not want to dwell on things that you all are very well aware of. instead, i will focus on something you probably have not heard about – on the “ china experience ” of the bank of lithuania, describing how and why we “ went to china ”. later i will provide some remarks on the remaining obstacles for further involvement of institutional investors – such as ourselves. i will conclude by briefly discussing the overall prospects of renminbi internationalisation – the over - arching topic of our panel today. but, before moving on, let me just briefly mention a couple of points on the international role of the renminbi, which will show why the timing of our involvement in the chinese bond markets was not so self - evident. indeed, over the last few years, china has made progress in opening up the country ’ s financial sector. from lifting the caps on foreign ownership in financial sector institutions, to increasing access to its onshore market – china is making more renminbi - denominated assets available to foreign investors. but these achievements were enabled by one key turning point that came before the most recent developments. the major milestone, of course, was the addition of the renminbi into the imf ‘ s sdr basket in 2016. this was a historic event, signalling to global investors that china was emerging as a significant stakeholder in the global monetary and financial system. subsequently, international investors, particularly sovereign investors, became much more interested in china. in this context, the bank of lithuania was ahead of the curve in 2012. that year, we decided to become one of the first central banks to enter china ’ s onshore bond market. this decision had come well before the ren

judge by looking at the section which is visible above the surface. this is in my view a useful metaphor, because as the crisis gradually unfolded, a chain of unexpected problems came to the surface and vulnerabilities that were previously underestimated became apparent. let us consider first the tip of the iceberg, namely the liquidity crisis. tensions in money markets erupted in august 2007 when the us mortgage market, which was at the epicentre of a complex network of financial derivative products held globally, started to un - ravel. liquidity in interbank markets worldwide dried up as market participants became paralysed by uncertainty. the key problem was that counterparty risk – which had hitherto remained bis central bankers ’ speeches limited – suddenly increased in great proportions because the distribution of risk exposures to us subprime mortgage markets was markedly opaque. this led some market segments to partially freeze and others to close completely. this is where the second layer of the iceberg comes onto the stage. the collapse of lehman brothers in the autumn of 2008 triggered an exceptionally abrupt re - pricing of risks globally. it led to a very significant intensification of the financial crisis ; to a temporary freeze in trade financing and a global trade decline ; to a curtailment of credit and domestic demand ; and, ultimately, to a severe decline in global demand and output. the main channels through which the crisis was transmitted internationally are now relatively well understood, although the extent and strength of the interconnectedness was quite surprising in real time. activity corrected most in countries where credit was booming prior to the crisis, with large current account deficits, high external debt and highly leveraged financial sectors, in particular. 1 in the euro area, a channel of particular importance was the fact that some banks had tapped us wholesale funding markets in large amounts to finance their activities. 2 some of these banks were in addition as heavily involved as us banks in the production of allegedly riskfree securities, such as asset - backed commercial paper, that aimed to meet the needs of us money markets funds. 3 they were severely hit when these markets froze. moreover, although the euro area ’ s current account was broadly balanced, it still had significant gross external assets and liabilities vis - a - vis the us, which acted as a powerful conduit of the crisis. challenges became more intricate still when the third layer of the iceberg – the sovereign debt crisis – surfaced towards the end of 2009. risk re - pricing intensified