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Appendix: Cross-Correlograms of Ibpbb Factors and Macro Variables
European Central Bank and International Monetary Fund, respectively. This paper was previously entitled “Understanding Chinese Bond Yields.” We thank several departments of the People’s Bank of China, Nigel Chalk, Kai Guo, Ken Nyholm and James Roaf for their valuable comments. All remaining errors are our own.
We would like to thank Ken Nyholm for suggesting a two-step estimation procedure.
Prior to 2009 the PBC announced both a broad money and a credit (new lending) target. Due to the stimulus response that followed the collapse of Lehman Brothers, the PBC canceled its 2008 targets, and did not announce any monetary or credit target for 2009. A broad money target was reintroduced in 2010.
From May 2004, there have been two types of repo transactions. Under the collateralized repo, the underlying bond is placed with a custodian without the underlying ownership transferred, while in the outright repo the ownership of the bond is transferred. The collateralized repo market is by far the most active. In addition to funding, adding the outright repo allows for the short-term lending of securities. Consequently, for funding purposes, only the collateralized repo is relevant.
A similar pattern applied to the relative size and liquidity of PBC bills. As of the end of May 2010, outstanding Treasury bonds and PBC bills accounted for 30.0 percent and 22.8 percent of outstanding bonds, respectively. Nonetheless, the transaction volume for PBC bills far exceeds that for Treasury bonds. Between June 2007 and May 2010, the cumulative transaction volumes of Treasury bonds and PBC bills accounted for 9.6 percent and 40.0 percent, respectively, of cumulative bond market transaction volume.
While the China Development Bank (CDB) continues to be the major issuer of policy financial bonds (accounting for over 70 percent of these bonds), in 2008 the State Council formally approved an overall reform plan for China Development Bank that explicitly called for its transformation into a commercial bank. Although the regulatory agencies have formulated transitional policies for CDB, the market’s holding and trading preferences with respect to CDB bonds may have changed. However, as discussed below, despite this the behavior of these bonds does not seem out of line with that of other bonds during this period.
The PBC recently announced a pilot scheme in 2010 that allows some listed commercial banks to trade in the exchange market.
The crossing point is calculated as the point the two estimated Nelson-Siegel yield curves are equal.
IPOs have typically involved significant funds—multiples of the size of the IPO—being locked up for a period of around a week given the extent of oversubscription, and have been a large driver of interbank volatility (Porter and Xu, 2009).
Note all the factors displayed in Figure 7 are for yields expressed in monthly terms and divided by 100. Displayed slope parameters are the negative of the second estimated factor.
Note that the long-term factor estimated from the PBC bills yield curve is not directly comparable to the other long-term factors. The former includes information only up to three year yields whilst the latter include information up to ten year yields. Thus, the former is likely a biased estimate of the “true” underlying long-term interest rate as it is closer to the medium term yields (i.e. curvature factor of other yield curves). Interestingly, the level factor of the PBC yield curve behaves more like the curvature factor of the other yield curves (see Figure 7).
Policy Bank (Financial) bonds (IBPBB) were chosen as the focus given their higher market liquidity.
We report orthogonalized impulse response functions (OIRFs). The ordering of the variables is such that yield curve factors are ordered prior to macro variables, with policy variable(s) are put at the end, following the suggestion in Diebold and others (2006). Generalized impulse responses (GIRFs) which are independent of the ordering of the variables were also computed and give, broadly, qualitatively similar results. Similar results, not reported in the paper but available from the authors upon request, are obtained for other yield curves, e.g. IBTSY, and IBCAAA.
Similarly IBCB yield curve factors have also an impact on other yield curve factors e.g. IBTSY and IBCAAA.
Recall in this paper the slope factor is defined as −β2t, while in the other two papers, the slope factor is equated with β2t directly. Diebold and others (2006) proxy growth using capacity utilization rather than using industrial production, as done in Hoffmaister and others (2010) and here.
We use 500 simulations with sampling of blocks of 8 observations to construct the bootstrap distributions.
We are grateful to Ken Nyholm for providing the MATLAB code used in Coroneo and others (2008) for the implementation of the no-arbitrage tests.
The data on bid-ask spreads comes from Bloomberg, and due to limitations only covers April 2010 to June 2011.