Repo Market and Structure of Short Term Interest Rates in China

Studienarbeit aus dem Jahr 2011 im Fachbereich BWL - Bank, Börse, Versicherung, Xiamen University, Sprache: Deutsch, Abstract: Money market refers to the market where financial institutions make transactions of

short-term financial instruments for short-term financing and liquidity management.

Chinäs money market is mainly made up of interbank funding market and bond

repurchase agreement market commonly referred to as repo market.

Some scholars argue that Chinäs financial liberalization remains incomplete as the

behaviour of short-term market-determined interest rates is influenced by regulated rates.

This paper argues that to have integrity of the market China should further liberalize its retail

interest rates to allow all interest rates to better reflect liquidity conditions and the scarcity of

capital.

At present, the relevant research of the term structure of interest rates of China is

mostly directed against a certain specific market or a certain specific method, lacking market

integrality. For constructing a systemic, scientific term structure of interest rate of China,

respective term structure of interest rate is deduced from the treasury bond market, bank

deposit market, inter-bank borrowing market, bank repo market, and RMB interest rate swap

market. And then according to different weights, a synthesized term structure of interest rate

of China is constructed out. Finally, empirical research is carried on by use of this method.

Empirical results show that the method is better than the traditional methods, and the

synthesized term structure curve of interest rate by the method is between various kinds of

term structure curves by the traditional methods, reflecting the situation and information of

each market on the whole.

Since the market-oriented economic reform in 1978, China has entered into a stage of

financial deregulation and liberalization. With the growth of the national economy and

change of national income structure, Chinäs finance has increased rapidly, which brought

great changes in the financial structure. In 1978, broad money (M2) balance was near

RMB150 billion yuan. By the end of 2001, broad money balance was up to RMB16000

billion yuan, an increase of over 100 times in the past twenty years.