The Dissipating Credit Channel: Monetary Policy and Corporate Bond Yields in China

This article examines how monetary policy transmission to corporate bond yields across credit ratings in China has evolved amid financial development and policy reform. We construct a unified measure of monetary policy shocks that consolidates heterogeneous policy instruments using a modified heteroscedasticity-based identification strategy in a structural VAR. Combining this shock measure with bond yield data and local projection methods, we document a pronounced shift in transmission patterns. Prior to 2014, monetary easing has no statistically significant effect on bond-yield dispersion, and lower-rated bonds are at least as responsive as higher-rated bonds. After 2014, lower-rated bonds respond much less, leading to a significant increase in bond-yield dispersion following expansionary shocks. A mechanism analysis further shows that changes in the transmission mechanism for the monetary policy appear linked to China’s ongoing monetary policy reform process.