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Understanding Chinese Bond Yields and their Role in Monetary Policy

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  • Mr. Nathan Porter
  • Mr. Nuno Cassola

Abstract

China's financial prices are informative enough for the PBC to introduce a monetary policy framework centered around interest rates. While bond yields are not fully efficient?reflecting regulation, liquidity, and segmentation?we find they contain considerable information about the state of the economy as well as evidence of an emerging transmission channel: changes in PBC rates influence the structure of Treasury, financial, and corporate bond yield curves, which are then associated with changes in growth and inflation. Coporate spreads are also a leading indicator of growth and inflation. While further liberalization will strengthen both efficiency and transmission, several necessary elements to move towards indirect monetary policy are already in place.

Suggested Citation

  • Mr. Nathan Porter & Mr. Nuno Cassola, 2011. "Understanding Chinese Bond Yields and their Role in Monetary Policy," IMF Working Papers 2011/225, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/225
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    References listed on IDEAS

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    1. Mr. Tarhan Feyzioglu & Mr. Nathan Porter & Elöd Takáts, 2009. "Interest Rate Liberalization in China," IMF Working Papers 2009/171, International Monetary Fund.
    2. Mr. Nathan Porter & Ms. TengTeng Xu, 2009. "What Drives China’s Interbank Market?," IMF Working Papers 2009/189, International Monetary Fund.
    3. International Monetary Fund, 2010. "Peru: Staff Report for the 2010 Article IV Consultation," IMF Staff Country Reports 2010/098, International Monetary Fund.
    4. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    5. Mr. Willy A Hoffmaister & Mr. Jorge Roldos & Ms. Anita Tuladhar, 2010. "Yield Curve Dynamics and Spillovers in Central and Eastern European Countries," IMF Working Papers 2010/051, International Monetary Fund.
    6. International Monetary Fund, 2010. "Republic of Estonia: Staff Report for the 2009 Article IV Consultation," IMF Staff Country Reports 2010/004, International Monetary Fund.
    7. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
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    Cited by:

    1. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.
    2. Güneş Kamber & Madhusudan Mohanty, 2018. "Do interest rates play a major role in monetary policy transmission in China?," BIS Working Papers 714, Bank for International Settlements.
    3. Nathan Porter & TengTeng Xu, 2016. "Money-Market Rates and Retail Interest Regulation in China: The Disconnect between Interbank and Retail Credit Conditions," International Journal of Central Banking, International Journal of Central Banking, vol. 12(1), pages 143-198, March.
    4. Liu Kerry, 2023. "The Effects of Foreign Participation on Chinese Government Bond Yields," Folia Oeconomica Stetinensia, Sciendo, vol. 23(2), pages 222-240, December.
    5. Cruz, Prince Christian & Gao, Yuning & Song, Lei Lei, 2014. "The People’s Republic of China’s Financial Markets: Are They Deep and Liquid Enough for Renminbi Internationalization?," ADBI Working Papers 477, Asian Development Bank Institute.
    6. Kerry Liu, 2022. "The Chinese Government Bond Markets: Foreign Investments and Market Efficiency," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 14(1), pages 93-104, January.
    7. Jennie Bai & Michael J. Fleming & Casidhe Horan, 2013. "The Microstructure of China's Government Bond Market," Staff Reports 622, Federal Reserve Bank of New York.
    8. Makram El-Shagi & Lunan Jiang, 2023. "How the PBoC´s new MLF affects the yield curve," CFDS Discussion Paper Series 2023/1, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.

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