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Requiem for the interest rate controls in China
Author(s) -
Sun Rongrong
Publication year - 2021
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12341
Subject(s) - deregulation , interest rate , economics , financial repression , china , monetary economics , shadow (psychology) , disintermediation , financial system , market economy , finance , psychology , political science , law , psychotherapist
Abstract This paper reviewed the retail interest rate control deregulation in China over the period 1993–2015 to provide a preliminary assessment of the People's Bank of China's (PBC's) new operating framework. The interest rate controls triggered the development of deposit substitutes that banks used to circumvent the restrictions, which, in turn, drove deposits out of commercial banks. This gave rise to concerns about a deterioration of bank profits and a build‐up of financial fragility, which have pushed up the PBC's deregulation acceleration over the post‐2012 period. This study quantified the distortionary effects of these controls: disintermediation, a rising shadow banking system, and financial repression. Despite the official lifting of controls, retail interest rates are still subject to the PBC's window guidance and other pricing mechanism guidance. The preliminary assessment of the new interest rate corridor system is encouraging: Its bounds are effective most of the time.