Funding liquidity and money market interest rate—New Evidence from China

Abstract

This paper investigates the relationship between funding liquidity and money market interest rates comprehensively. Different from previous literature, by discussing the funding liquidity demand and supply of Chinese financial system comprehensively and using four main categories of money market interest rates, this paper finds strong evidence that funding liquidity supply, measured by M2 and excess deposit reserve rate of commercial banks, funding liquidity demand measured by the change of A-share accounts and fund raised by financial market greatly influence the money market interest rates of interbank lending and repo rates across different maturities. But SHIBOR is only sensitive to the change of funding liquidity supply factors rather than the demand factors. This paper also finds that funding liquidity affects market interest rates through market liquidity. The results of this paper provide reference for further interest liberalization in China.