July 4th, 2018

Discussion Paper 2018/5 is now available: Rongrong Sun: Monetary Policy Announcements and Market Interest Rates’ Response: Evidence from China


This paper uses the event study to estimate the impact of various monetary policy announcements on market interest rates in China over the 2002-2017 period. I find that financial markets understand the quantitative signals better: the market response to an announced adjustment of the regulated retail interest rate and the required reserve ratio is positive and significant at all maturities of bond rates, but smaller at the long end of the yield curve. However, the market barely responds to announced changes in the qualitative policy stance index, which contains limited vague information and is easily anticipated. Two newly introduced central bank lending rates do not appear to be sufficient to replace the retail interest rate and the reserve ratio in guiding market rates in the post-deregulation era. My results suggest that the PBC adopts a publicly announced short-term interest-rate operating target regime, similar to the Fed’s federal funds rate target.


July 4th, 2018

Discussion Paper 2018/4 is now available: Rongrong Sun: Requiem for the Interest-Rate Controls in China


This paper reviews the retail interest-rate-control deregulation in China over the 1993-2015 period and provides a preliminary assessment of the PBC’s replacement monetary framework. I show that the interest-rate controls triggered the development of deposit substitutes that banks used to circumvent the restrictions, which in turn drove deposits out of commercial banks. Concerned by deterioration of bank profits and build-up of financial frangibility, the PBC has been pushing strongly for interest-rate liberalization. I quantify the distortionary effects of these controls: disintermediation, a rising shadow banking system and financial repression. Despite the official lift-off of the controls, the retail interest rates are still subject to the PBC’s window guidance and other pricing mechanism guidance. The interest-rate corridor does not function well in confining money market rates. This suggests that the PBC adopt a target money market rate system.


May 8th, 2018

Discussion Paper 2018/3 is now available: Michael Funke, Rongrong Sun, Linxu Zhu: The Credit Risk of Chinese Households – A Micro-Level Assessment

Abstract: Household borrowing in China has increased considerably in recent years, raising concerns about the household sector’s vulnerability and implications for the stability of the financial system. We construct a number of granular debt-burden indicators at the level of individual Chinese households and calculate the share of households that are financially vulnerable using the three available waves (2011, 2013 and 2015) of China’s Household Finance Survey. Overall loan-to-value (LTV) ratios appear safe and sound at first glance, but closer scrutiny reveals that Chinese households in the lowest income quintile face high vulnerability and struggle to meet their debt commitments. Our stress tests suggest that Chinese households in higher quintiles, despite the huge increase in household indebtedness, are not particularly vulnerable to declining incomes or falling house prices.


May 2nd, 2018

We are proud to announce our new CFDS Monetary Policy Reports. New Reports will be available after every major policy change but at least once per quarter. With our reports we hope to provide a concise and timely assessment that makes Chinese monetary policy more accesible to an international audience.

March 30th, 2018

Discussion Paper 2018/2 is now available: Dia, E. / Jiang, L. / Menna, L. / Zhang L.: Common Banking across Heterogenous Regions

Abstract: We document the existence of a substantial dispersion of interest margins charged by commercial banks among Chinese provinces, and we build a parsimonious dynamic stochastic general equilibrium model featuring both banking and production sectors that we calibrate at both the national and provincial level. Our model can explain a considerable share of the interest margin charged in di fferent provinces, and we find support for the hypothesis that Chinese banks adopt a similar technology  across di fferent provinces. Since in the case of Chinese provinces diff erences in wages are substantial, the adoption of a national technology implies an inefficient industrial structure for the banking industry. The adoption of a common nationwide technology generates also a stronger response of the rate on loans to productivity shocks than would be the case if banks adopted di fferent technologies in diff erent provinces, and the capability of banks to smooth regional idiosyncratic productivity shock hitting fi rms declines substantially.


March 24th, 2018

We are excited to announce that we started our first Policy Forum on current political and economic issues today. Take a look at our first issue about Trumps new protectionism.

Policy Forum 1 (March 2018)

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