Money market refers to an exchange for buying and selling of financial and money market instruments where financial institutions make transactions of short-term financial instruments for short-term financing and liquidity management. China’s money market is mainly made up of interbank funding market and bond repurchase agreement market commonly referred to as repo market.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, China’s finance has increased rapidly, which has brought a great deal of changes in the financial structure. In 1978, broad money (M2) balance was near RMB150 billion yuan. By the end of 2001, M2 balance was up to RMB16,000 billion yuan, an increase of over 100 times in the past twenty years, implying a growth rate of 5 percent a year in 20 years. However, with this financial development and deepening, China needs to liberalize the financial market further and let the liquidity conditions reflect the market realities and integrity.
Some scholars argue that China’s financial liberalization remains incomplete as the behavior 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.
China has taken important steps to liberalize its interest rates. Short-term interbank interest rates were liberalized initially, financial and treasury bond yields were liberalized soon after, followed later by the liberalization of the corporate fixed income market. The creation of the short-term financing bond in 2005 and medium-term financing note in 2008, with unregulated interest rates and liberal issuance criteria, were major advances in the development of the corporate financing market. In 2007, seeking to make interest rates better reflect market conditions and create a more stable benchmark yield curve at longer maturities, the Chinese authorities also launched the Shanghai Interbank Offered Rate (SHIBOR) benchmark rate system.In so doing we hope this will reflect a better and genuine financial Liberalization with integrity of the market that is more aspiring and creates market confidence.
Keywords: Financial Liberalization, Integrity of the Market.
Table of Contents
1.0 Introduction
2.0 The Gap between M2/GDP and Financial Assets Value/GDP Ratio
3.0 Government Bond Market
4.0 Capital Market in China
5.0 Monetary Market
6.0 Banking Industry
7.0 Observations and Discussions
7.1 Interbank interest rates
8.0 Implications
9.0 Conclusion
Research Objectives and Thematic Focus
This paper aims to critically analyze how the structure of short-term interest rates and the liquidity market reflect actual liquidity conditions and the scarcity of capital in China, while assessing the progress and remaining challenges of financial liberalization.
- Evolution of China's financial structure and assets since 1978.
- Role and development of the government bond and capital markets.
- Analysis of the monetary market, including interbank lending and repo markets.
- Impact of the banking industry's monopolistic structure and policy reforms.
- Necessity of further interest rate liberalization to enhance market integrity.
Excerpt from the Book
Government Bond Market
The establishment of government bond market in China is a breakthrough point in restructuring financial assets. In traditional planning economy, the government tried with great efforts to achieve the objective of “No domestic debt and international debt”, which was regarded as one of the advantages of the socialist system. All these wrong ideas and rigid planning system stifled the development of government bond market.
After the economic reform, the Chinese government recovered or issued the first debt security in 1981. Although the total value of the first issue was less than 5 billion yuan, it added a new instrument to China’s financial structure. More importantly, it remarked the beginning of China’s financial structural change. Prior to 1994, the government financed budget deficits by borrowing from the central bank, instead of issuing debt. Although the outstanding of government debt was quite limited, the overdraft from the central bank had the direct effect on creating monetary base and ultimately interest rates. As a result, the monetary base and government deficits changed in the same direction. This phenomenon was vividly described as “collusion” between the Treasury and central bank in China. In the process of the reform, the government had to provide subsidies to some of the interest “losers”, in order to keep a stable environment for the further reform. Moreover, the government had to continue the large-scale investment in order to speed up the capital formation. All these strengthened the hard restraint of the government expenditures and increased budget deficits. And borrowing from the central bank to cover the deficits in turn led to the oversupply of money. This became the main causes for expansion of demand and high inflation in 1994.
Summary of Chapters
1.0 Introduction: Provides an overview of the money market and the historical context of China's economic reforms since 1978.
2.0 The Gap between M2/GDP and Financial Assets Value/GDP Ratio: Analyzes the rapid growth of financial assets and the widening gap between broad money and non-monetary financial assets.
3.0 Government Bond Market: Details the transition from a "no debt" policy to the establishment of a government bond market as a tool for financial restructuring.
4.0 Capital Market in China: Examines the development of the stock market and the underdevelopment of corporate debt financing within the Chinese economy.
5.0 Monetary Market: Discusses the rapid development of interbank lending and repo markets and their evolving role in liquidity management.
6.0 Banking Industry: Explores the challenges of the state-dominated banking sector, including policy lending and the accumulation of bad debts.
7.0 Observations and Discussions: Critically evaluates the state of financial liberalization and the influence of regulated rates on market-determined interest rates.
7.1 Interbank interest rates: Investigates the determinants of Chinese interbank interest rates and their interdependency with administered retail rates.
8.0 Implications: Outlines the benefits of further interest rate liberalization for macroeconomic management and efficient capital allocation.
9.0 Conclusion: Summarizes the milestones achieved in China's financial reforms and reiterates the need for further liberalization to ensure market integrity.
Keywords
Financial Liberalization, Integrity of the Market, Money Market, Interest Rates, Government Bond Market, Capital Market, Banking Industry, Liquidity Conditions, Scarcity of Capital, Economic Reform, Monetary Policy, Debt Financing, SHIBOR, Corporate Debt, Financial Structure.
Frequently Asked Questions
What is the central focus of this publication?
The paper examines the evolution of China's financial structure, focusing on how recent market-oriented reforms and the lingering effects of government regulation influence liquidity and capital allocation.
What are the primary thematic fields covered?
It covers money and capital markets, government and corporate bond development, the banking sector, and the overarching theme of interest rate liberalization.
What is the main research objective?
The goal is to determine how the current structure of interest rates and the liquidity market affect market integrity and to argue for the necessity of further liberalizing retail interest rates.
Which scientific methodology is applied?
The author uses a descriptive analysis of economic time-series data, historical institutional analysis, and synthesis of existing literature on interest rate determinants in China.
What does the main body address?
The main body breaks down the individual components of China’s financial system, including the bond, stock, and interbank markets, and analyzes their responsiveness to policy changes.
Which keywords best characterize the work?
Key terms include financial liberalization, market integrity, liquidity conditions, and interest rate reform.
How did the relationship between the government and the central bank change in 1994?
In 1994, the government was prohibited from borrowing directly from the central bank, which was intended to grant the central bank more independence in managing monetary supply and policy.
Why does the author argue that China's financial liberalization is still incomplete?
The author notes that despite various reforms, a ceiling on deposit rates and a floor on loan rates remain, which prevents interest rates from fully reflecting market liquidity and capital scarcity.
What role did the "four assets management corporations" play in 1999?
They were established to facilitate the clearing of bad debts from state-owned banks, as part of the broader reform to transfer enterprise "debts" into "shares."
- Arbeit zitieren
- Dr. Francis Mulenga Muma (Autor:in), 2011, Financial Structural Change, Liberalization and Liquidity Market Integrity in China, München, GRIN Verlag, https://www.grin.com/document/198598
