| The interbank bond market in China has been developed for over16years since it was first established in1997.According to the latest data from the central bank by the end of2013, the interbank market accounts for more than95percent of the total trading volume.The figure illustrates that the bond trading mainly deals in the interbank market in our country. However, the efficiency of bond market is intimately linked to the market liquidilty. A prerequisite for resources allocation of bond market also refers to the market liquidity, which also helps the market functioning properly. Additionally, the market liquidity is an important indicator set to measure the capital market maturity. Greater market liquidity is supposed to benefit the market trading quality and efficiency. Although the interbank parts still dominates the bond market, their large deals with lower trading frequency do not help with the market liquidity. A market hampered by low liquidity would hardly has room to grow, so that the overall importance of the study on the factors of market liquidity in the interbank bond market is evident.At the same time, the interest rate liberalization in China have been making new progress constantly. The liberalization of the interbank offered rate and the bond market rate was nearly completed before1997in our country, and the establishment of the interbank bond market, which happened in1997, had also been an indispensible procedure that helped China to approach the liberalization of interest rate. Since then, China had done more efforts to accomplish the liberalization of interest rate, such as the liberalization of foreign currency (domestic) lending and deposit rates and the RMB lending rate, the reform of RMB deposit rate. The former have been completed so far,while the deposit rates cap has not been canceled yet.The interest rate is essentially the market price of money, the reform of the interest rate liberalization will influence the efficiency and liquidity of the interbank bond market inevitably. But the effect may be a double-edged sword. This paper will present the impact of these policies about the interest rate liberalization and the causes of those effects.The paper firstly gave the definition of market liquidity and generalize its measurement indicator, presented the index of bid-ask spreads and trading volume indicators. According to current research results,the most appropriate measurement indicator of the liquidity of interbank bond market is the bid-ask spreads, and the paper chose the log spread and trading volume to measure the liquidity levels of interbank bond market.Then the paper summarized the main factors of what influenced the liquidity of the interbank bond market. These factors were divided into the internal ones and the external ones. The internal determinants include the characteristics of the bond products itself and the financial market microstructure. The external determinants include the influence of the macroeconomic and policies. And because this paper studied the market interest rate policy for the liquidity of the interbank bond market, so the interest rate market policies was defined as a separate factor.Theoretically the reform of the interest rate liberalization provides both positive and negative effect on the liquidity of interbank bond market. The positive effect is that the interest rate liberalization removed the restrictions of the changing of interest rates, while the bond price movements in turn depends on the changes in market interest rates, the deregulation of interest rate will promote the bond pricing more effective and more flexible to change, so as to improve the enthusiasm of the participants in the market transactions, raise the trading volume in the market and has a positive effect on the liquidity of interbank bond market. The negative impact is that the interest rate liberalization will directly reduce the amount of the investment of commercial banks in the interbank market, so as to reduce the liquidityof interbank market.This paper used empirical analysis to test those effects. The liquidity of the interbank bond market was set as a explained variable, which selected the log spread and the market turnover to measure the market liquidity. The market liquidity was set as aexplanatory variable, while the policy factors would be the dummy variable, building two multiple linear regression models that explain the market liquidity. A linear regression was performed in the sample data. Using a successive regression to eliminate the variables that are not significant to adjust the model. Finally, using Iterative method to solve problems in the first order sequence, and draw the final model after adjustment. Empirical analysis shows that, in the short term, the cancellation of the loan interest rate is to produce negative influence on the liquidity of the interbank bond market.This result is consistent with the former expectation. Then this paper analyzes the causes of negative effects. The interest rate liberalization lead to the decrease of the interest spreads of deposit and loan, which will cause the reduction of interest income of commercial banks and the tightening of bank funds.These will reduce the trading volume in the interbank market trading volume so that the market liquidity of interbank bond market will be lower. These was analyzed with the relevant data.This paper develops three suggestions for reduce or eliminate the side-effects on the market liquidity of interbank bond market made by the interest rate liberalization. The first one is to stimulate commercial banks to provide some business innovation and engage in off-balance-sheet activities and intermediary business vigorously, in order to change their profit model. Therefore, commercial banks would enforce a high spread between the lending and deposit rates, a relatively large capital adequacy ratio and a substantial anti-risk ability. The second is to diversify the investor structure of the interbank bond market for the sake of spreading the risks posed by unfavorable moves, in particular, away from the commercial banks.The last suggestion is to push the interest rate liberalization gradually. For instance, to lift the cap on the deposit rate in phases, so that the negative impaction would be minimized. |
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