US monetary policy spillovers, maturity mismatch and Chinese corporate financing premium☆

The term premium of Chinese corporate bonds has become an important factor driving up the long-term financing rate, which is also highly synchronized with the US policy rate. We establish a Proxy SVAR model to investigate US monetary policy spillovers on the term premium, and we find that tightening US monetary policy leads to capital outflow from China, increasing the term premium, high long-term financing costs, and ultimately decreasing investment and output. We further construct a multi-sector open-economy DSGE model with financial friction to explain empirical findings. Results show that after a rise in the US policy rate, capital flows out from China and the balance sheet of financial intermediaries deteriorates, thereby causing a decline in long-term asset allocation and an increase in the term premium. Counterfactual analysis indicates that US monetary policy spillovers are amplified by maturity mismatch regarding the expansion of short-term foreign debt, holding of longer-duration bonds, and tightening of borrowing constraints. Finally, we compare the effects of short-term rate policy, asset purchase, and macro-prudential stabilization tax policy.