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Requiem for the Interest-Rate Controls in China

Rongrong Sun ()

No 2018/4, CFDS Discussion Paper Series from Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China

Abstract: This paper reviews the retail interest-rate-control deregulation in China over the 1993-2015 period and provides a preliminary assessment of the PBC’s replacement monetary framework. I show that the interest-rate controls triggered the development of deposit substitutes that banks used to circumvent the restrictions, which in turn drove deposits out of commercial banks. Concerned by deterioration of bank profits and build-up of financial frangibility, the PBC has been pushing strongly for interest-rate liberalization. I quantify the distortionary effects of these controls: disintermediation, a rising shadow banking system and financial repression. Despite the official lift-off of the controls, the retail interest rates are still subject to the PBC’s window guidance and other pricing mechanism guidance. The interest-rate corridor does not function well in confining money market rates. This suggests that the PBC adopt a target money market rate system.

Keywords: interest-rate control; deregulation; China; financial repression; interest-rate corridor (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2018-07
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-tra
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http://cfds.henuecon.education/images/dpaper/WP_4_ ... st_rate_controls.pdf First version, 2018 (application/pdf)

Related works:
Journal Article: Requiem for the interest rate controls in China (2021) Downloads
Working Paper: Requiem for the Interest-Rate Controls in China (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fds:dpaper:201804

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