What Drives China’s Interbank Market?
IMF Working Papers, September 1, 2009
Source details
- Canonical URL
- What Drives China’s Interbank Market?
Other formats
Bibliographic details
- Authors: Nathan Porter, TengTeng Xu
- Published: September 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451873368.001
Summary
- Interest rates in China comprise a mix of both market determined interest rates (interbank rates and bond yields), and regulated interest rates (lending and deposit rates), reflecting China's gradual process of interest rate liberalization.
- Using a theoretical model and empirical analysis, the authors argue that the regulation of key retail interest rates diminishes the ability of the market determined rates to act as independent price signals, or as benchmarks for use in asset pricing and monetary policy.
- Further interest rate liberalization should strengthen the information conveyed by movements in interest rates, allowing for the better pricing of risk and capital.
Key findings and empirical conclusions
- Regulation of retail lending and deposit rates reduces the informativeness of market-determined interbank rates and bond yields.
- Market rates under regulated retail rates are less effective as independent price signals and less useful as benchmarks for asset pricing and monetary policy.
- Theoretical modeling and empirical analysis support the conclusion that liberalization would enhance the signaling role of interest rates.
Policy implications and recommendations
- Further interest rate liberalization is recommended to:
- Strengthen the information content of movements in interest rates.
- Improve the pricing of risk and capital.
- Enhance the usefulness of market rates as benchmarks for asset pricing and monetary policy.