Reduction Effect Of Bond Market Deepening To The Monetary Mismatch In China

Monetary mismatch, which is due to a different denominated currency usage incalculating country’s balance of payments or economic activities, causes a differencebetween the structure of assets and liabilities, moreover, results in the risk bearing ofnet worth or net income due to exchange rates fluctuation.China and the U.S, the two largest economies over the world, are containing thesubstantial risk of monetary mismatch. Attributing to the bond market developmentbackwardness, the massive domestic savings is difficult to convert effectively intocapital inside the region. Coupling with the unfinished RMB internationalization,capitals can only maintain and increase their value through the purchase of foreigncurrency denominated assets or claims (mainly in US-dollar assets or claims). Theinadequate financial market also causes the absence of effective financial instrumentsto hedge monetary risks, thereby the degree of monetary mismatch is underaccumulation.This study will unfold with the combination of theoretical and empirical,qualitative and quantitative analysis methods. First, the revaluation of the monetarymismatch degree AECM index is provided. With the introduction of US perspective,the decomposition the U.S. monetary mismatch degree is undertaken as well. Then,factor rotation analysis method will be adopted to indicate the deepening extent ofChina’s bond market.Again, the mechanism of reduction affect to the monetary mismatch, such asinitiating hedge derivatives, altering foreign investment demand, promoting thedeepening of capital markets, will be revealed by building VAR model and regressionanalysis.This paper draws the conclusion that Sino-US monetary mismatch has asignificant extent and rising trend. The fiscal bond market deepening exerts amitigating effect to monetary mismatch risk with significance and priority. In parallel,the size of the offshore bond market serves a similar significant effect. Theappropriate advices of onshore and offshore bond market development measures willbe presented accordingly.