Completing China's Interest Rate Liberalization

22 Pages Posted: 23 Mar 2016

See all articles by Yuyan Tan

Yuyan Tan

Peking University

Yang Ji

Xiamen University - School of Economics

Yiping Huang

Peking University, National School of Development

Date Written: March–April 2016

Abstract

China's recent removal of the last ceiling restriction on deposit rates in October 2015 is a milestone in interest rate liberalization, but not the end of it. International experience suggests that, without structural and quantitative reforms, simply freeing interest rates can result in major financial stress. Before China's central bank can completely relinquish implicit or explicit guidance for commercial banks' interest rate determination, it needs to accomplish two tasks: improvement of commercial banks' pricing capability as well as the monetary policy transmission mechanism. Both tasks require significant reform measures to be initiated, such as enforcing market discipline, forming a new monetary policy framework, developing money and capital markets, abandoning quantitative restrictions on credit and reforming the financial regulatory system.

Keywords: dual‐track financial system, interest rate liberalization, quantity and structural reforms

JEL Classification: E26, E44, G18

Suggested Citation

Tan, Yuyan and Ji, Yang and Huang, Yiping, Completing China's Interest Rate Liberalization (March–April 2016). China & World Economy, Vol. 24, Issue 2, pp. 1-22, 2016, Available at SSRN: https://ssrn.com/abstract=2753314 or http://dx.doi.org/10.1111/cwe.12148

Yuyan Tan (Contact Author)

Peking University

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Yang Ji

Xiamen University - School of Economics ( email )

China

Yiping Huang

Peking University, National School of Development ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

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