Completing China's Interest Rate Liberalization
22 Pages Posted: 23 Mar 2016
Date Written: March–April 2016
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: Suggested Citation