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Although China's monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy have often been simple reestimations or recalibrations of models originally designed to describe US or European monetary policy. In this paper, we aim to assess Chinese monetary policy and, in particular, monetary policy transmission through yield curves into the real economy. Our study takes into account the peculiarities of the Chinese economy: Namely, our model includes both China's modern attempts at a market-based monetary policy as well as the "authority-based" one that is a relic of the original banking system. Besides, it considers the special nature of the Chinese treasury bond market, which is separated into two independent ones with very limited direct arbitrage opportunities between almost identical assets. Finally, it incorporates the role of real estate, which played an essential role in China during the last decade. Our results show that different monetary policy shocks cause asymmetric effects on macroeconomic and financial variables. [ABSTRACT FROM AUTHOR]

Examining monthly data from May of 1985 to May of 2008, we find that increases in Chinese purchases of U.S government debt lead to decreases in Treasury yields. The effect is stronger as the maturity increases: a one percent increase in purchases of U.S. Treasuries by Chinese investors lowers the two-year (ten-year) Treasury yield by 10 to 38 basis points (39 to 55 basis points) on average, ceteris paribus . Overall, the demand-side variable capturing Chinese purchases of U.S. Treasuries improves the cointegrating properties of U.S. interest rates. In-sample and out-of-sample forecasts reinforce that the model with Chinese purchases greatly outperforms basic models of the yield curve. This study has implications for the business world since we document that Chinese investors contribute to lower U.S. Treasury yields and thus to lower U.S. interest rates in general. [ABSTRACT FROM AUTHOR]

China controls its exchange and interest rates, and does not offer RMB interest rate derivatives in China. As China is an emerging market, people expect a certain level of inefficiencies in its bond market. This can be illustrated in the way that some bonds are transacted at prices that appear to bear little relation to their fair values. However, closer inspection reveals that this is not due to market inefficiency per se, but rather the fact that bond traders in China may buy and sell bonds in bundled form. As an example, a trader may seek to hide his losses on one bond by selling it at an inflated price at the same time as buying another bond, also at an inflated price; thus, while the bonds may, individually, deviate from their fair price, bundled together, the aggregate price is fair. This is only possible for over-the-counter bond transactions, due to the opaque nature of the trade process; all bonds traded on the exchanges are transacted at their fair values. [ABSTRACT FROM AUTHOR]