Requiem for the interest rate controls in China

Rongrong Sun (Lead / Corresponding author)

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    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.
    Original languageEnglish
    Article number1
    Pages (from-to)139-160
    Number of pages22
    JournalPacific Economic Review
    Volume26
    Issue number2
    Early online date20 Aug 2020
    DOIs
    Publication statusPublished - May 2021

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