China’s policy target rates: a preliminary comparative analysis

ABSTRACT

The People’s Bank of China began to discuss the importance of DR007 (the 7-day repurchase rate by deposit-taking institutions at China’s interbank market) from 2016. This study compares the performance of the fixed DR007 (FDR007) to that of the other popular policy target rate, the FR007 (the fixed 7-day repurchase rate by both deposit-taking institutions and non-deposit-taking institutions). This is the first known study to make this comparison. Using a variety of methodologies, and based on daily datasets for January 2018 – December 2019, this study concludes that the FDR007 outperforms FR007 with respect to policy target rates.

KEYWORDS:

• People’s bank of China
• monetary policy
• policy target rate
• policy rate
• FR007
• FDR007
• EGARCH
• interest rate pass-through
• robust least squares
• cointegration analysis

JEL classification:

• E43
• E52
• E58

Acknowledgements

The author would like to thank the editor, Professor Ashima Goyal, and anonymous referees for very timely and valuable comments on an earlier version of this paper. All errors are the author’s sole responsibility.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Notes

1. Strictly speaking, the trade war is still going on as the tariffs have not been lifted, but there was a ‘truce’ from December 2019 (see Liu 2020a).

2. From the very beginning of FDR007 (31 May 2017), there are at most 11 quarterly data items between Q3, 2017 and Q1, 2020.

3. https://www.gov.cn/xinwen/2016-11/08/5130275/files/c1557d8af70a45699e142e1f2c6f4d71.pdf (in Chinese). The discussion of interest rate corridor can also be found from the analysis conducted by the director of research at the PBC following http://opinion.caixin.com/2018-07-04/101291889.html (in Chinese).

4. See http://k.caixin.com/web/detail_15775 (in Chinese).

5. http://www.chinamoney.com.cn/fe/Channel/19348 (in Chinese).

6. Source: Wind (https://www.wind.com.cn/en/). Wind is the mostly widely used Chinese economic and financial data provider. It serves more than 90% of the financial firms in the Chinese market, and 75% of the qualified foreign institutional investors in China.

7. Source: Wind.

8. Volatility clustering refers to the phenomenon that large changes in FR007 and FDR007 tend to be followed by further large changes and, similarly, that small changes tend to be followed by further small changes (Mandelbrot 1963; Porter and Xu 2016).

9. It is noted that not all of these liquidity management instruments intend to only achieve the policy target rate. For example, SLF tenors are overnight, 7-day and 1-month; MLF maturities range from 3 to 12 months; PSL tenors range from 3 to 5 years. Especially, the PSL provides the major funding for China’s shantytown renovation programme (Liu 2019c).

10. On a trial basis of the exact date of operation, this study finds that inclusion of SLF operation does not significantly improve the explanatory power of regressions.

11. See http://www.waizi.org.cn/law/14866.html (in Chinese).

12. IPO and funds locking up data can be found from http://stock.stockstar.com/ipo/analysis_5_1_21.html.

13. Since YTM_12 M (yield to maturity of China’s 12-month government bond) is marginally stationary (at a 10% confidence level), the cointegration tests are performed. The results show that while the coefficient of FDR007 is still larger than that of FR007, both are insignificant with 10% confidence (results are not reported, but available upon request). It means that the interest rate pass-through from policy rates to longer maturity bonds gradually became weak (see Table 2) and eventually insignificant during the study period.

Additional information

Notes on contributors

Kerry Liu

Kerry Liu (Mr.) is an Associate at the China Studies Centre, University of Sydney, Australia. He has been a China economist, working in the private sector across Asia Pacific including Beijing, Hong Kong and Sydney. He holds a PhD in Finance from the University of Melbourne (Australia), and a B.Eng. in Mechanics from Tongji University (Shanghai).