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Dissecting the segmentation of China's repo markets

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  • Xu, Xiaoqing Eleanor

Abstract

China repos trade in the over-the-counter interbank market as well as the stock exchange. This paper examines the behaviors, sources, and drivers of the spread between China's exchange and interbank repo rates from December 2006 to June 2018. After adjusting for different day-count quoting methods, I dissect the exchange to interbank repo spread into two components: cross-market segmentation between exchange and interbank markets for non-depository institutions (NDIs), and within-market counterparty segmentation between NDIs and depository institutions (DIs) in the interbank market. The 1-day repo markets are found to be more segmented, with the spread mainly driven by the cross-market segmentation for NDIs, reflecting the two different market mechanisms and trading frictions that prevent NDIs from effectively arbitraging across the two markets in the shorter tenor. On the other hand, the 7-day repo markets are found to be less segmented, with the spread mainly driven by the counterparty segmentation between NDIs and DIs within the interbank market, reflecting greater counterparty credit and liquidity risks for NDIs relative to DIs. Further analysis uncovers the impacts of quarter-end effect, monetary policies, and shadow banking activities on the cross-market and within-market segmentations in China's repo markets.

Suggested Citation

  • Xu, Xiaoqing Eleanor, 2021. "Dissecting the segmentation of China's repo markets," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:pacfin:v:70:y:2021:i:c:s0927538x21001529
    DOI: 10.1016/j.pacfin.2021.101645
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    References listed on IDEAS

    as
    1. Michael Funke & Petar Mihaylovski & Haibin Zhu, "undated". "Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control," GRU Working Paper Series GRU_2016_007, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
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    3. repec:zbw:bofitp:2015_009 is not listed on IDEAS
    4. Emily Perry & Florian Weltewitz, 2015. "Wealth Management Products in China," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 59-68, June.
    5. Leonardo Bartolini & Spence Hilton & Alessandro Prati, 2008. "Money Market Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 193-213, February.
    6. Ross Kendall & Jonathan Lees, 2017. "The Chinese Interbank Repo Market," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 75-86, June.
    7. Kate McLoughlin & Jessica Meredith, 2017. "The Rise of Chinese Money Market Funds," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 75-84, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Repo; Segmentation; Liquidity; Interbank; Exchange;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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