China’s bond markets are now sufficiently good leading indicators of growth and inflation that China’s central bank could switch from using quantitative targets and administrative controls to money-market interest rates to execute monetary policy, according to a new IMF Working Paper by Nuno Cassola and Nathan Porter. The two say that “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 [People’s Bank of China] rates influence the structure of Treasury, financial, and corporate bond yield curves.”
Cassola and Porter, who are with the European Central Bank and International Monetary Fund respectively, also say there is strong evidence that regulated retail interest rates significantly affect bond yields, making this regulation one likely cause of pricing inefficiencies. The two say that further liberalization across bond markets (their study looked at four interbank bond markets and the retail markets for exchange-traded Treasury bonds) will strengthen both efficiency and transmission, and that necessary elements to move towards market-based monetary policy are in place.
China Bystander 