Interest Rate Liberalization in China

IMF Working Papers, August 1, 2009

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Interest Rate Liberalization in China

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Bibliographic details

• Authors: Tarhan Feyzioglu, Nathan Porter, Elöd Takáts
• Published: August 1, 2009
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451873184.001

Summary and main findings

• China's most binding interest rate control is a ceiling on the deposit rate; lending rates are also regulated.
• Through case studies and model-based simulations, the authors find that liberalization will likely:
  • result in higher interest rates,
  • discourage marginal investment,
  • improve the effectiveness of intermediation and monetary transmission,
  • enhance the financial access of underserved sectors.
• The analysis suggests these benefits can occur without any major disruption.
• International experience indicates that achieving these benefits without unnecessary instability requires:
  • vigilant supervision,
  • governance,
  • monetary policy,
  • a flexible policy toolkit.

Policy implications and recommendations

• Implement interest rate liberalization while strengthening regulatory supervision and governance.
• Adjust monetary policy frameworks and maintain a flexible policy toolkit to manage transitional risks.
• Use liberalization to improve financial access for underserved sectors while monitoring for discouraged marginal investment.

Subjects and keywords

• Subjects: Banking, Commercial banks, Deposit rates, Financial institutions, Financial services, Interbank rates, Interest rate policy, Loans, Monetary policy
• Keywords: bank bankruptcy, bank lending, China, Commercial banks, deposit rate, deposit rate rise, Deposit rates, financial deregulation, Financial liberalization, IB rate, IB rate target result, impact interest rate liberalization, Interbank rates, interest rate liberalization, Interest rate policy, lending rate, lending rate falling, lending rate regulation, Loans, market power, monetary policy, Target IB, Target IB rate, target result, WP

Source: Interest Rate Liberalization in China — IMF Working Paper No. 2009/171 (landing page content).

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