What is a "sterilization bond"?

R

Raul641

The WSJ said Friday:
To keep the yuan down, China's central bank sells newly printed yuan in the foreign exchange market in return for dollars. Since an increased supply of yuan would fuel inflation, the central bank sops up the extra currency by issuing special "sterilization" bonds. These bonds, Mr. Bernanke said, crowd out other assets, "interfering with the growth and development of private financial markets."
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I am unfamiliar with this term. Would someone be so kind as to explain what a sterilization bond is, and how it works to sop up extra currency?

Thanks.
 
Quote from Raul641:

The WSJ said Friday:



I am unfamiliar with this term. Would someone be so kind as to explain what a sterilization bond is, and how it works to sop up extra currency?

Thanks.
More...

It's just a term used to describe bonds issued by government to mop up excess liquidity, in other words, "sterilize" the inflationary effects of excess yuan created when exporters of China earn US$ and wanted to exchange back into yuan. Without the issuance of such bonds, there will be too much liquidity when these excess yuan flood the market.
 
My interpretation:

A Chinese company sells goods to the USA in exchange for USA dollars. Chinese company then exchanges USA dollars for Chinese yuan. Chinese company then exchanges yuan for Chinese bonds ("sterilization bonds") from the Chinese government. Yuan is removed from the private sector and not available for (inflationary?) purchases of Chinese stocks, goods and services. Chinese treasury is full of yuan.

I suspect the process is an exercise in nonsense. I can think of no historical precedent when a government possessing lots of money did not spend (squander?) the wealth. Excessive spending can have inflationary consequences.
 
Thanks for the replies. So, a "sterilization" bond is just an ordinary bond in every way except that its purpose is not really to borrow money, but to remove liquidity from a currency?

Have any other countries experiencing inflation done this? What was the result? (I'm thinking of the canonical hyperinflation example of Germany in the 1920s. Didn't they try something like this?)
 
if there is chronical hyperinflation the government very likely is trying to print it's way out of debt obligations so they really want the money
 
In a hyperinflation situation, what happens if:

1) Government prints a ton of cash, pays debts;
2) Government issues bonds
3) Government shreds cash received from bond sale.


I'm also interested in how this works in situations with less severe inflation, like what China is presumably doing now. Are there any other examples of a government trying (successfully or unsuccessfully) to control inflation through bond sales and then sitting on the proceeds?
 
The federal reserve did something similar after the Plaza accord in 85. They wanted to devalue the dollar, the fed was printing dollars and selling it(for yen, mark,etc) and at the same time selling bonds in the open market to not raise the money supply(they were offesetting it because they didnt want the dollar in a free fall, just to devalue a little)
 
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