The Research On China’s Medium-term Notes Market Liquidity

April15,2008, The People’s Bank of China published the "Inter-bank bondmarket non-financial corporate debt financing tool management approach",whichallow qualified non-financial company to issue medium-term notes to qualifiedinstitutional investors in the inter-bank bonds market. As short-term financing billsare an alternative of short-term loans with one year maturity, medium-term notesbecame important medium-term financing instruments apart from corporate bonds. Itis also an alternative of loan with3-5years maturity from high credit rating company.With the process of economic globalization accelerating and the requirements ofdomestic multi-system financial markets developing, the medium-term bonds marketwill also satisfy the needs of a number of domestic participants and participants fromcapital market. Within this situation, conducting on research liquidity of china’smedium-term bonds is significant for improving the quality and internationalcompetitiveness of china’s medium-term bonds market. Thus, medium-term bondsmarket has been taken full effect in terms of improving the structure of capital marketand decentralizing financial system risk.This paper covered three aspects of the market liquidity of medium-term bonds,including theoretical analysis, practical study and measurement research. In the partof theoretical analysis, the explanation of liquidity in securities market is based on theprice discovery and market structure theory which belongs to microstructu re theory.In terms of practical study, this paper demonstrates the history of the development ofmedium-term bonds market, and summarized the factors that can affect liquidity ofmedium-term bonds and the reasons why liquidity is not sufficient. Finally, themeasurement research illustrates that the measurement that medium-term bondsapplied is combining micro and macro level. In addition, with taking governmentbonds and corporate bonds as reference, this paper investigates the current liquidityposition and its influencing factors. Furthermore, liquidity risk is measured byValue-at-Risk (VaR) model. This paper also investigates traditional VaR and VaRwhich is introduced liquidity risk in terms of the accuracy of market risk, andsimultaneously measures liquidity risk in the market occupies a proportion of risk.Finally, based on the current liquidity of medium-term notes and research results, thispaper provides some suggestions in terms of medium-term notes market supply, market demand for medium-term notes, medium-term notes market intermediaries andmedium-term notes market supervision respectively. These suggestions will improveand strength liquidity of medium-term notes.