The Roadmap of Interest Rate Liberalization in China

Chong, Terence Tai Leung and Liu, Wenqi (2016): The Roadmap of Interest Rate Liberalization in China. Forthcoming in: Economic and Political Studies

Abstract

This paper examines the roadmap of interest rate liberalization in China, including the current dual-track interest rate system and the future benchmark rate system. It provides a theoretical foundation for China to develop its own benchmark interest rate. A Vector autoregression model (VAR) is estimated to investigate the effectiveness of Chinese market interest rates, Shanghai Interbank Offered Rate (SHIBOR), and repo rates against different factors such as market size, volatility, transmission channels of monetary policy, and term structures of interest rates. The result shows that SHIBOR affects both the market and the economy. As SHIBOR promptly reflects the changes in currency markets, we argue that it has the potential to become China’s benchmark interest rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: SHIBOR, interest rate liberalization, shadow banking.
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Atesoglu, Sonmez. 2003. “Monetary Transmission—Federal Funds Rate and Prime Rate.” Journal of Post Keynesian Economics, 26(2), 357–362.

Bernanke, Ban, and Alan Blinder. 1992. “The Federal Funds Rate and the Channels of Monetary Transmission.” American Economic Review, 82(4), 901–921.

Byrd, William. 1983. China's Financial System: The Changing Role of Banks. Westview Press: Boulder, Colorado.

Chen, Yong, and Jinyou Wu. 2008. “Dui woguo huobi shichang lilv tixi chuandao jizhi de shizheng yanjiu [Empirical Analysis on the Interest Rate Transmission in Money Market].” Shanghai Finance (In Chinese), 5, 27-29.

Cho, Yoon Je. 1986. “Inefficiencies from Financial Liberalization in the Absence of Well-functioning Equity Markets.” Journal of Money, Credit and Banking, 18(2), 191–199.

Cottarelli, Carlo, and Angeliki Kourelis. 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy.” IMF Staff Papers, 41(4), 587–623.

DaCosta, Maria Manuela Neveda, and Jennifer Ping Ngoh Foo. 2002. “China’s Financial System: Two Decades of Gradual Reforms.” Managerial Finance, 28(10), 3–18.

Dai, Genyou. 2000. “Guanyu woguo huobi zhengce de lilun yu shijian wenti [Theory and Practice on Monetary Policy in China].” Journal of Financial Research (In Chinese), (9), 1-12.

Dai, Guoqiang, and Futao Liang. 2006. “Zhongguo jinrong shichang jizhun lilv xuanze de jingyan fenxi [Analysis on the Choice of Benchmark Interest Rate in China’s Financial Market].” Journal of World Economy (In Chinese), 4, 3-11.

Dickey, David A., Dennis W. Jansen, Daniel L. Thornton, and Tom Fomby. 1991. “A Primer on Cointegration with an Application to Money and Income.” Federal Reserve Bank of St. Louis Review, 73(2), 58–78.

Edwards, Sebastian, and Mohsin S. Khan. 1985. “Interest Rate Determination in Developing Countries: A Conceptual Framework.” IMF Staff Papers, 32(3), 377–403.

Engle, Robert F., and Clive W. J. Granger. 1987. “Co-integration and Error Correction: Representation, Estimation, and Testing.” Econometrica, 55(2), 251–276.

Estrella, Arturo, and Gikas A. Hardouvelis. 1991. “The Term Structure as a Predictor of Real Economic Activity.” Journal of Finance, 46(2), 555–576.

Feng, Zongxian, Jianwei Guo, and Tianxiang Huo. 2009. “Shichang jizhun lilv Shibor de jizhunxing jianyan [The Benchmark Test on Shibor Rate].” Journal of Xi'an Jiaotong University (Social Sciences, In Chinese), 3, 24-29.

Guo, Lei. 2009. “Woguo huobi zhengce lilv chuandao qvdao youxiaoxing de shizheng yanjiu [Empirical Analysis on the Effectiveness of Channels of Monetary Transmission].” China Business (In Chinese), 2009(23), 53–55.

Hall, Anthony D., Heather M. Anderson, and Clive W. J. Granger. 1992. “A Cointegration Analysis of Treasury Bill Yields.” Review of Economics and Statistics, 74(1), 116–126.

He, Dong, and Honglin Wang. 2012. “Dual-track Interest Rates and the Conduct of Monetary Policy in China.” China Economic Review, 23(4), 928–947.

Hefferman, Shelagh A. 1997. “Modelling British Interest Rate Adjustment: An Error Correction Approach.” Economica, 64(254), 211–231.

Kuttner, Kenneth N., 2001. “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market.” Journal of Monetary Economics, 47(3), 523–544.

Lin, Yifu. 2003. “Jinrong gaige yu nongcun jingji fazhan [Financial Reform and the Rural Economic Development].” Shanghai Reform (In Chinese), 10, 27–31.

McKinnon, Ronald I. 1973. Money and Capital in Economic Development. Brookings Institution: Washington.

Pesaran, Hashem, and Yongcheol Shin. 1998. “Generalized Impulse Response Analysis in Linear Multivariate Models.” Economics Letters, 58(1), 17–29.

Pei, Ping, and Peng Xiong. 2003. “Woguo huobi zhengce chuandao guocheng zhong de “shenlou” xiaoying [The “Leakage Effect” in the Transmission of Monetary Policy in China].” Economic Research Journal (In Chinese), 8, 21-27.

Qin, Qiling and Ping Lu. 1995. “Fazhanzhong guojia de lilv ziyouhua zhengce ji qi qishi [Interest Rate Liberalization in Developing Countries].” Foreign Economics and Management, In Chinese), 12, 17–19.

Rosen, Richard J. 2002. “What Goes Up Must Come Down? Asymmetries and Persistence in Bank Deposit Rates.” Journal of Financial Services Research, 21(3), 173–193.

Sa, Qi. 1996. “Lilv shichanghua yu gao lilv guanxi de guoji jingyan [International Experience on the Relationship between Interest Rate Liberalization and High Interest Rate].” Studies of International Finance (In Chinese), (1), 40-45.

Shao, Chuan. 2007. “Cong lilv “shuanggui” kan lilv chuandao jizhi de bu lianxu [The Review of the Interest Rate Transmission from the “Dual-Track” Interest Rate].” Market Modernization (In Chinese), 13, 396-397.

Shaw, Edward S. 1973. Financial Deepening in Economic Development. Oxford University Press: New York.

Walsh, Carl E. 2003. Monetary Theory and Policy (2nd ed.). MIT Press: Cambridge, MA.

Wang, Guosong. 2001. “Zhongguo de lilv guanzhi yu lilv shichanghua [China’s Interest Rate Control and Liberalization].” Economic Research Journal (In Chinese), 6, 13-20.

Wu, Jinglian. 2002. “Yinhang gaige: Dangqian Zhongguo jinrong gaige de zhong zhong zhi zhong [Reform in Commercial Banks: the Most Important Thing in Current Financial Reform in China].” World Economic Papers (In Chinese), 3, 12-28.

Wu, Wei. 2007. “Lianbang jijin lilv fazhan jingyan ji dui Shibor tuiguang de qishi (shang) [Federal funds rate: Development and implication for promoting Shibor (I)].” China Money (In Chinese), 2007(8), 49–53.

Xu, Jian. 2003. “Lilv ziyouhua de yueshu ji qi shijian [The Restrictions and Practice of Interest Rate Liberalization].” Journal of Financial Research (In Chinese), 8, 53-59.

Yi, Gang. 2009. “Zhongguo gaige kaifang sanshi nian de lilv shichanghua Jincheng [Interest Rate Liberalization in China’s Reform and Opening in the Last 30 years].” Journal of Financial Research (In Chinese), 1, 1-14.

Zhang, Jie. 1995. “Zhongguo jinrong gaige de jiantao yu jinyibu gaige de tujing [The Review and Future on China Financial Reform].” Economic Research Journal, 5, 3-10.

Zhang, Lin, and Guangwen He. 2009. “Woguo huobi shichang jizhun lilv Shibor shizheng fenxi ji yunxing pingjia [Empirical Analysis on Shibor as the Benchmark Interest Rate].” Finance Theory and Practice, 4, 9-12.