Understanding Chinese Bond Yields and their Role in Monetary Policy

IMF Working Papers, September 1, 2011

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

Use of yield-curve analysis to assess information content of Treasury, financial, and corporate bond yields.
Attention to institutional factors limiting yield efficiency: regulation, liquidity, segmentation.
Emphasis on the role of corporate spreads as a forward-looking signal for macroeconomic activity and price dynamics.

Progress toward an interest-rate centered monetary policy framework is justified by the informational content of bond yields.
Continued financial liberalization would enhance yield efficiency and the effectiveness of monetary transmission.
Monitoring and integrating corporate spreads into policy analysis can improve near-term signals for growth and inflation.

Understanding Chinese Bond Yields and their Role in Monetary Policy — IMF Working Paper (2011), Working Paper No. 2011/225.