Echo over the Great Wall: Spillover Effects of QE Announcements on Chinese Yield Curve

This paper examines the spillover effects of announcements on quantitative easing (QE) conducted in developed economies on the Chinese Treasury yield curve. In spite of China’s firewall of cross-boarder capital control, we find that the US QE announcements move the Chinese yield curve immediately and significantly, through the channels of signaling and portfolio balancing. The results are robust across a variety of event analysis methods using reduced-form or structural models. Using the heteroskedasticity assumption
for shock identification in an arbitrage-free term structure model, it was identified that the impact of US QE on Chinese yields was comparable, in size and significance, to China’s own monetary policy shocks.