Interest Rate Liberalization in China

Author/Editor: Tarhan Feyzioglu ; Nathan Porter ; Elöd Takáts
Publication Date: August 01, 2009
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: What might interest rate liberalization do to intermediation and the cost of capital in China? China's most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.
Series: Working Paper No. 09/171
Subject(s): Banking | Banking sector | Banks | Credit controls | Credit demand | Economic models | Financial intermediation | Interest rates

Author's Keyword(s): Financial liberalization | financial deregulation | interest rate liberalization | China
Notes Full text also available in Chinese
Publication Date: August 01, 2009
ISBN/ISSN: 9781451873184/1018-5941 Format: Paper
Stock No: WPIEA2009171 Pages: 29
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