Interest Rate Determination in China: Past, Present, and Future

HKIMR Working Paper No.04/2014

28 Pages Posted: 21 Feb 2014

See all articles by Dong He

Dong He

Hong Kong Monetary Authority; Hong Kong Institute for Monetary Research (HKIMR)

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Xiangrong Yu

Hong Kong Monetary Authority

Date Written: February 20, 2014

Abstract

How should we think about the determination of interest rates in China after interest rate liberalisation? Would effective deposit rates, lending rates and bond yields move higher or lower? We argue that interest rates in a liberalised environment would need to be anchored by the conduct of monetary policy. If monetary policy is to achieve the objective of price and output (or employment) stabilisation, the policy rate should be set close to China’s equilibrium or natural rate. We sketch three preliminary approaches to estimation of the natural rate in China. Based on these we argue that interest rates on large deposits in the banking system and short-term money market rates would likely to move higher following interest rate liberalisation. The effect on effective lending rates is somewhat ambiguous as the contestability of the banking sector and the competition in bond markets are likely to increase after interest rate liberalisation. We leave the determination of the curvature of the yield curve to future research.

Keywords: Interest Rate, Monetary Policy, Economic Reform, Chinese Economy, The People’s Bank of China (PBC)

JEL Classification: E43, E52, O53, P24

Suggested Citation

He, Dong and Wang, Honglin and Yu, Xiangrong, Interest Rate Determination in China: Past, Present, and Future (February 20, 2014). HKIMR Working Paper No.04/2014. Available at SSRN: https://ssrn.com/abstract=2398801 or http://dx.doi.org/10.2139/ssrn.2398801

Dong He (Contact Author)

Hong Kong Monetary Authority

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Hong Kong Institute for Monetary Research (HKIMR)

3 Garden Road, 8th Floor
Hong Kong
China

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Xiangrong Yu

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
8 Finance Street, Central
Hong Kong

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