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Interest Rate Liberalization in China

Nathan Porter, Elod Takats and Tarhan Feyzioglu

No 2009/171, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; deposit rate; monetary policy; lending rate; bank lending; Financial liberalization; financial deregulation; interest rate liberalization; China; Target IB; lending rate falling; Target IB rate; lending rate regulation; impact interest rate liberalization; IB rate target result; IB rate; market power; target result; bank bankruptcy; deposit rate rise; Deposit rates; Interbank rates; Loans; Interest rate policy; Commercial banks (search for similar items in EconPapers)
Pages: 29
Date: 2009-08-01
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Handle: RePEc:imf:imfwpa:2009/171