Determinants of the Onshore and Offshore Chinese Government Yield Curves

41 Pages Posted: 18 Jul 2013  

Horst Loechel

Frankfurt School of Finance & Management gemeinnützige GmbH; China Europe International Business School (CEIBS)

Natalie Packham

Berlin School of Economics and Law

Fabian Walisch

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: July 18, 2013

Abstract

As part of its effort to internationalize the Renminbi, China’s government has promoted the establishment of a regulated offshore Renminbi capital market hub in Hong Kong, where, among other activities, it issues RMB-denominated government bonds providing foreign investors access to Chinese bond markets. In a VAR model where yield curves are represented by Nelson-Siegel latent factors and which includes macroeconomic variables, we find that on-shore government bond yields are primarily driven by policy-related factors such as the policy rate and money supply, whereas offshore government bond yields are additionally driven by market-related factors such as consumer confidence, GDP and FX rate expectations as well as liquidity constraints. At the current stage of market development there are virtually no spillover effects between the onshore and offshore government bond curves. Our results add quantitative evidence that China’s efforts to internationalize its currency results in a simultaneous liberalization of its financial system.

Keywords: Chinese government bond yields, Chinese offshore market, RMB, Hong Kong

JEL Classification: E43, E47, E63, G18

Suggested Citation

Loechel, Horst and Packham, Natalie and Walisch, Fabian, Determinants of the Onshore and Offshore Chinese Government Yield Curves (July 18, 2013). Available at SSRN: https://ssrn.com/abstract=2295260 or http://dx.doi.org/10.2139/ssrn.2295260

Horst Loechel

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Natalie Packham (Contact Author)

Berlin School of Economics and Law ( email )

Badensche Strasse 50-51
Berlin, D-10825
Germany

HOME PAGE: http://www.packham.net

Fabian Walisch

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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