Chinese Local Bond Spreads, Monetary Policy and ‘Misallocation’

HKIMR Working Paper No. 7/2018

43 Pages Posted: 30 Mar 2018

See all articles by Robert Dekle

Robert Dekle

University of Southern California - Department of Economics

Andrew Tsang

Hong Kong Monetary Authority

Date Written: March 26, 2018

Abstract

We examine the impact of Chinese monetary policies on excess local bond yields (the spreads over Chinese government bonds), on local bonds issued by Chinese local government entities. We find that an expansion in M2 generally raises the excess yields on bonds issued by local government entities, and the impact is amplified for bonds issued by the local governments. This last category is considered as as having a high degree of existing resource misallocation. Our estimation results confirm that excess yield on local bonds can be an indicator of market risk of local government debts and the financial efficiency of local governments.

Keywords: Chinese Local Bonds, Local Government, Money Policy, Misallocation

JEL Classification: G12, E50, H81

Suggested Citation

Dekle, Robert and Tsang, Andrew, Chinese Local Bond Spreads, Monetary Policy and ‘Misallocation’ (March 26, 2018). HKIMR Working Paper No. 7/2018. Available at SSRN: https://ssrn.com/abstract=3149322 or http://dx.doi.org/10.2139/ssrn.3149322

Robert Dekle (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-8335 (Phone)

Andrew Tsang

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
Hong Kong
Hong Kong

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