Scandinavian Working Papers in Economics

Working Paper Series,
Stockholm School of Economics, China Economic Research Center

No 2009-9: WHAT MOVES BOND YIELDS IN CHINA?

Longzhen Fan and Anders C. Johansson ()
Additional contact information
Longzhen Fan: School of Management, Fudan University
Anders C. Johansson: China Economic Research Center, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: This paper analyzes the joint dynamic processes of macroeconomic and monetary variables and bond yields in China. We show that macroeconomic variables as well as monetary policy variables have a significant impact on two factors that capture the variation in yields. An increase in the inflation rate and economic growth result in a rise in the yield curve. Similarly, an increase in the money supply causes a rise in the yield curve, albeit with a delayed effect. Finally, when official rates are raised, the long yield shows signs of a delayed decline. Overall, the long yield is more sensitive to most changes in macroeconomic and monetary variables. These results differ from an earlier study on bond yields by Ang and Piazzesi (2003), who show that the U.S. short-term rate is more sensitive to changes in macroeconomic variables. Possible explanations for the difference include certain unique structural features in the domestic financial system and the way monetary policy is conducted in China.

Keywords: China; yield curve; macroeconomic factors; monetary policy

JEL-codes: E43; E44; E52; E58; G12

34 pages, June 1, 2009

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