The impact of macroprudential cross-border capital flow management on the linkage of domestic and foreign bond markets

Abstract

Cross-border financing activities in China have increased significantly in recent years, and the inflow of capital may lead to accumulated financial risks. To mitigate financial risks and promote the opening of financial markets, macroprudential management policies for cross-border financing have been implemented since 2016. This paper examines the effectiveness of macroprudential management policies in opening financial markets and managing foreign financial risks. We employ a time-varying parameter vector autoregressive (TVP-VAR) model to quantitatively analyze changes in the spillover effects between Chinese bond market and foreign bond markets under different implementation stages of cross-border financing macroprudential policies. Our analysis reveals that the implementation of macroprudential management of cross-border financing has increased the total spillover effect between different bond markets, as well as the spillover effect from other bond indices to the Chinese RMB Bond Index and the spillover effect from other indices to the Chinese USD index. Moreover, our findings indicate that macroprudential management has reduced the total volatility spillover effect and the volatility spillover effect from other indices to the Chinese RMB Bond Index. These results highlight the importance of preventing external risk transmission when China’s financial market is opening to the world.