A Stony On The Operation Of Benchmark Interest Rate In The Process Of Interest Rate Marketization

The liberalization of interest rates has been started in China since the1980s. It isnecessary to establish a money market interest rate system to take the benchmarkinterest rate as a kernel in order to accelerate the interest rate marketization, financialreform, product innovation and active trading in China financial market. The thesisillustrates that the construction of benchmark interest rate is a requirement for interestrate marketization with its connotation and domestic circumstances. As the mainbenchmark interest rates in international financial market listed in the thesis, we findthat they share the following points in common: benchmark interest rates usually areinterbank offered rates, benchmark interest rates are interbank bid rates; benchmarkinterest rates require maturity structure integrity; benchmark interest rates liberalizedhugely; benchmark interest rates are lauched and regulated by specialized agencies. Thethesis focuses on the analysis of the Federal Fund Rate and the London InterbankOffered Rate, particularly the amalysis of LIBOR’s operating problems revealed inBarclays’ scandal to provide reference for domestic benchmark interest rate’sdevelopment and improvement. The thesis summarizes the marketability, benchmarkcharacteristics, stability, relevancy, conductibility, structure, testability,controllability,which a benchmark interest rate required. It had already been discussedin academia whether treasury interest rate, bond repurchase rate, deopsit rate orinterbank offered rate was capable of being the benchmark interest rate in China’smonetary market when the SHIBOR has not yet been launched before2007. At differentstages of domestic financial market, each interest rate listed above has played the role asbenchmark in a certain period, but none of them is capable of being operating as thedomestic money market benchmark interest rate because of the deficiency of theircharateristics and the relying market.The benchmark interest rate which reflects and influences on changes in otherinterest rates in monetary market, is the kernel of interest rate system, serving as amonetary policy transmitting instrument by the central bank and the price basis offinancial products in the market. On January4th,2007, the Shanghai Interbank OfferedRate, or SHIBOR, was launched by the central bank to provide it as China’s potentialmonetary market benchmark interest rate. Thus monetary policies can be successfullyconducted by means of interest rates. The thesis briefly sketches SHIBOR’s appearance and substance, and qualitatively analyzes SHIBOR’s operating impact on financial andmonetary market. Then it quantitively analyzes SHIBOR’s operating circumstances,covering linkage of SHIBOR in different terms, the relationships between short-termSHIBOR and money market interest rate, short-term SHIBOR and monetary policy,medium-and-long-term SHIBOR and monetary policy, SHIBOR and macroeconomy,SHIBOR’s response to accidental concussion, etc.According to the qualitative and quantitative analysis, the thesis concludes asfollow: SHIBOR has already had a integrated maturity structure; short-term SHIBOR ismore active; short-term SHIBOR offers stronger guidance on interbank offered rate;interbank pledge-style repo rate offers more powerful guidance on short-term SHIBOR;SHIBOR mainly references to interbank pledge-style repo rate in short term, and centralcounting rate in long term. SHIBOR shows obvious relevancy with macroeconomyserving as a tool in furture monetary policy. The SHIBOR’s stability makes itselfprompt in response to accidental and emergent concussion back to normal, and thereforeSHIBOR can be the pricing benchmark for financial products and the referenceindicator for financial market participants. The thesis generalizes and summarizes theinternal limiting factors on SHIBOR’s benchmark characteristics in view of itsoperating problems, such as irrational maturity structure in monetary market, SHIBOR’sincomplete quotation mechanism, smaller interbank lending market, dual-track interestrate system influence, obsolescent financial products, public unawareness, etc. Thethesis offers some suggestions on SHIBOR’s problems in order to improve thebenchmark characteristics for SHIBOR and accelerate the process of China’s interestrate marketization.The thesis comes that the interbank offered rate is the most appropriate choice ofChina’s benchmark interest rate by means of qualitative and quantitative researches,while benchmark interest rate is the main line of the study, interest rates marketization isthe research background, as practical basis on other countries’ examples of interest ratesliberalization and benchmark selected experiences, theoretical basis on researches fromprevious scholars. Lauching to fill a vacancy in China’s benchmark interest rate, theSHIBOR has been confirmed as a benchmark interest rate in China’s monetary market.Now the construction for benchmark interest rate more focuses on the SHIBOR’simprovement. The thesis expresses the deficiency of SHIBOR by means of theoretical and practical analysis of the SHIBOR’s operating circumstances at present, analyzes itsdeep-rooted reasons combining with SHIBOR’s existing problems. Moreover, it alsoproposes some suggestions and solutions for the improvements on SHIBOR’sbenchmark characteristics. Generally speaking, at the developing stage of Chineseinterest rate marketization the central bank should provide an improved marketoperating circumstances for SHIBOR which is more fit for the interest rates liberalizedtrend on one hand, and should improve the SHIBOR’s formation mechanism, quotationmechanism, transmission mechanism, supervision mechanism etc. on the other hand forSHIBOR’s construction. Nowadays SHIBOR has been basically confirmed the status ofbenchmark interest rate, but it still needs to be improved on its obligations as the kernelof financial market.