Improving Formation Mechanism Of The China Treasury Yield Curve

With widening influence of China’s economy, improving process of RMB internationalization and interest rate liberalization, demands of the market-based risk-free fundamental benchmark interest rate have greatly increased. In November 2013, prime minister Li Keqiang put forward "Accelerate the interest rate liberalization and improve the treasury yield curve reflecting supply-demand relation", from " The Decision on Major Issues Concerning Comprehensively Deepening Reforms". It is meaningful for promoting the stability and maturity of China’s financial system, meanwhile. It is beneficial for enhancing the international competitiveness of China’s financial system. "How to improve the treasury yield curve reflecting supply-demand relation" became the significant challenges we have to face.I treat formation mechanism of treasury yield curve in China as the research object, making research on the problems existed in the China treasury yield curve and treasury market, explaining how to solve the problem through theoretical analysis, comparative analysis and empirical analysis such as time series regression analysis. I mainly answered three questions:Firstly, why we have to improve the formation mechanism of the treasury yield curve. Secondly, what problems exist in the formation mechanism of treasury yield curve in China.Thirdly, how to improve the formation mechanism of treasury yield curve. The purposes are promoting the construction of the treasury market and bond market liquidity, providing the basis for the future of China’s financial strategy, providing pricing benchmark for interest rate liberalization, providing the backflow channels for the internationalization of the RMB, building powerful combination platform of fiscal policy and monetary policy.The paper is divided into five chapters. The specific content as follows:The first chapter is about the domestic and foreign literature review about treasury yield curve. Foreign research on treasury yield curve started earlier and they already have some theories and ideas. For example, treasury yield curve could forecast macroeconomic.An inverted treasury yield curve indicated a recession.Monetary policy and fiscal policy influence on treasury yield curve.The expectation factors could affect the treasury yield curve. Domestic research on treasury yield curve started relatively late, studied and validated the theories and ideas from overseas. But because of the particularity of China’s treasury market, treasury yield curve based on supply-demand relation has not been formed, so the related research in China is limited.The second chapter is to explain the meaning of the treasury yield curve and the related theories. This paper analyzed theoretically that the risk-free rate of benchmark interest rate plays a key role in the whole interest rate system, and illustrated the only based on the national credit, strong liquidity, the fairness of the yield curve to become a country’s benchmark interest rate of national debt. And government bond yield curve changes theoretically can often reflect market expectations, liquidity preference, priority habits and other kinds of information. All of those can contribute to China’s macro forecast and policy control.The third chapter is about present situation and problems of treasury yield curve. At present, the treasury yield curve exists problems on insufficient accuracy and consistency, under-represented, and insufficient capacity of macroeconomic conditions. And the deepening reasons that hinder the China treasury yield curve effectively are the treasury issuance system remains to be further modified; the treasury market participants do not reflect market supply-demand structure; the treasury market segmentation influences market efficiency; bond trading system cause liquidity shortage; imperfect tax accounting system limits yield curve formation.The fourth chapter is about management experience in the United States treasury yield curve. There are other hills where stones are good for working jade. Through a comprehensive study of the U.S. treasury market and treasury yield curve development history, I could understand the purpose behind the action adjusting the treasury yield curve by the United States. When treasury yield curve inverted, the United States would hold down long-term bond yields to stimulate the economy and boost real estate recovery. In different periods, the United States will coordinate monetary policy with fiscal policy to improve yield curve to achieve macroeconomic objectives, and achieved good effect. The method include:the issuance volume of short-term and long-term treasuries, total outstanding debt related to the fiscal deficit, open market operation twist, etc. The experience could benefit the formation mechanismof China’s treasury yield curve.The fifth chapter is the suggestions and measures to improve the treasury yield curve forming mechanism. I suggest promote the formation of the bond yield curve by legalization, liberalization and internationalization. For example, perfect the legal system of the treasury market, provide the market a sound legal basis; improve the system of treasury issuance, promote linkage of the treasury markets; perfect bond trading system, enhance the liquidity of the market; improve the infrastructure construction, promote interconnection of the treasury market; broaden and optimize the structure of the treasury market investors, enhance the international influence of the market; expand gradually the treasury yield curve functions in macroeconomic forecasting, internal and external policy control, Monetary and Fiscal policy control, financial pricing as benchmark.