Measuring China’s Interest Rate Liberalization Compared with Developed Countries

Financial repression does not suit the needs of economic and financial development in the long run, and interest rate liberalization is a natural choice for the development of China＇s financial markets＇. Based on a comparative analysis of interest rate liberalization processes between some developed countries and China and value assignment to key milestones in interest rate markets, the authors have measured the level of China＇s interest rate liberalization to be 80.64%, i.e., a complete liberalization has been initially achieved in China with the notable exception of the deposit interest rate market. Deposit interest rate liberalization is poised to be the last step in China＇s interest rate liberalization process.

Research on the Influence of Interest Rate Liberalization on Commercial Banks' Profitability in China

In order to explore the influence of interest rate liberalization on profitability,an empirical analysis is carried out with the panel data of commercial banks in China from 2009 to 2019.Then,the heterogeneity of the impact is studied among different banks.The results show that,first,interest rate liberalization and commercial banks'profitability have an inverted U-shaped relationship,whereby interest rate liberalization would increase the profitability of banks in the early stage but would reduce the profitability after reaching a peak inflection point at the later stage.Secondly,the impact varies among different banks,being more significant in urban commercial banks and large state-owned banks.

Completing China＇s Interest Rate Liberalization

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.

Interest Rate Pass-through in a Dual-track System:Evidence from China

Using the Phillips-Loretan approach, this paper verifies the degree and speed of pass- through and rigidity of different interest rates in China, as well as the response of private loan interest rates to other interest rates during 2002-2012. The results indicate that the long-term pass-through from the interbank offered rates and deposit and loan interest rates to the treasury bond rate is incomplete, but that the long-term pass-through to private loan interest rates is overshooting. The long-term pass-through from the deposit and loan interest rates to the overnight interbank offered rate is incomplete, while that to the interbank offered rates of other maturities is complete. The short-term passthrough and adjustment speed of interest rates exhibit asymmetry. Therefore, before considering a full liberalization of interest rates, it is important to further enhance the competition of the financial system and the function of different interest rate systems, such as the interhank market and bond market.

Do In terest Rate Liberalizati on and Fin tech Mix?Impact on Shadow Deposits in China

In this paper we attempt to characterize the stability of shadow deposits in China with interest rate liberalization and fintech developments.We emphasize that shadow banks provide higher but riskier returns and such characteristics affect the stability of shadow deposits.In our setting,the stability of shadow deposits is influenced by two offsetting effects,namely:the patience effect,which makes investors more willing to wait because of the potentially higher returns;and the uncertainty effect,which makes investors more likely to withdraw as a result of higher risk.Under liberalized interest rates,the patience effect will erode and the uncertainty effect will be heightened because the post-liberalization higher return of traditional banks undermines the importance of the extra return of shadow deposits to depositors,while preserving the importance of the risk aspect.Fintech development is modeled as a reduction in the withdrawal cost that facilitates runs.This affects the stability of shadow deposits because of their wider fintech reliance.Regulators should be cautious in pushing interest rate liberalization andfintech application alongside building a safety net for shadow banking.