China's Experience with Indexed Government Bonds, 1988-1996: How Credible Was the People's Republic's Anti-Inflationary Policy?

Abstract

The People's Republic of China introduced indexed government bonds in the face of the inflation panic of 1988-1989 and re-introduced them when inflation surged upward again in 1993. Measures of inflation expectations--as derived from the trading prices of these indexed bonds--suggest that the government gained credibility from its ability to contain inflation in 1989. But the government's failure to quickly halt the 1993-1995 inflation led, by late 1994, to soaring inflation expectations and, ultimately, a heavy financial penalty for the government as the 1992 and 1993 bond issues matured while inflation was still high.

JEL Classification: O16