Considering the recent developments in the money market in China, it can be said that varieties of market transaction have improved, the transaction scale has expanded and the market membership has also widened (Neftci and Ménager-Xu, 2007). However, in relation to other countries of the world, development of the Chinese money market requires further restructuring.
There are various components in the money market of China, namely the interbank market that conducts the lending and borrowing; repurchase market; and securities market. The operation of the money market is extremely crucial for financial sector reforms, operation of the commercial banks and smooth functioning of the monetary policy of the central bank. Nevertheless, bureaucratic controls on the interest rates of deposits and loans are still dominant, which renders the impact on other financial markets less powerful due to changes in the interest rates. It is also crucial for appropriate functioning of the fiscal policy (Neftci and Ménager-Xu, 2007).
The purpose of this essay is to discuss the development of various sub-segments of the Chinese money markets in the latest decade as well as to highlight crucial market issues. Some recommendations are also provided that can guide the course of future development of the money market with relevance to the policy implication.
Effective functioning of the monetary policy is dependent on creation of a vibrant money market. The money market forms a medium, where the central bank of an economy comes in contact with the entire financial system as well as determines the cost and availability of credit required by the financial institutions for proper functioning. As the Chinese economy is undergoing a number of reforms with the passage of time, number of members in the money markets is also rising. The once concentrated money markets have now expanded to include not only state-owned commercial banks and joint stock commercial banks, but also the local ...