The Factors that Affect Market Interest Rates in Chinese Bond Market

Unlike the central banks in the western countries, the Chinese central bank controls the term structures of bank deposit interest rates, and lending interest rates. They are called as official interest rates in the paper. Heavily affected by these official rates, market interest rates in the bond market behave in a unique way. Theoretical model and empirical study indicate that changes of official rate and inflation rate, and difference in market rate and official rate are three important factors to explain the change of market rate. The empirical evidence also shows that during period of high real official rate, market rate is mainly determined by official rate; during the period of low real official rate, both market rate and inflation rate are key variables to determine market rate.