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Interest Rate Determination in China: Past, Present, and Future

Author

Listed:
  • Dong He

    (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research)

  • Honglin Wang

    (Hong Kong Institute for Monetary Research)

  • Xiangrong Yu

    (Hong Kong Institute for Monetary Research)

Abstract

How should we think about the determination of interest rates in China after interest rate liberalisation? Would effective deposit rates, lending rates and bond yields move higher or lower? We argue that interest rates in a liberalised environment would need to be anchored by the conduct of monetary policy. If monetary policy is to achieve the objective of price and output (or employment) stabilisation, the policy rate should be set close to China's equilibrium or natural rate. We sketch three preliminary approaches to estimation of the natural rate in China. Based on these we argue that interest rates on large deposits in the banking system and short-term money market rates would likely to move higher following interest rate liberalisation. The effect on effective lending rates is somewhat ambiguous as the contestability of the banking sector and the competition in bond markets are likely to increase after interest rate liberalisation. We leave the determination of the curvature of the yield curve to future research.

Suggested Citation

  • Dong He & Honglin Wang & Xiangrong Yu, 2014. "Interest Rate Determination in China: Past, Present, and Future," Working Papers 042014, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:042014
    as

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    References listed on IDEAS

    as
    1. Garnier, Julien & Wilhelmsen, Björn-Roger, 2005. "The natural real interest rate and the output gap in the euro area: a joint estimation," Working Paper Series 546, European Central Bank.
    2. Julien Garnier & Bjørn-Roger Wilhelmsen, 2005. "The natural real interest rate and the output gap in the euro area: A joint estimation," Working Paper 2005/14, Norges Bank.
    3. He, Dong & Wang, Honglin, 2012. "Dual-track interest rates and the conduct of monetary policy in China," China Economic Review, Elsevier, vol. 23(4), pages 928-947.
    4. Dong He & Laurent L. Pauwels, 2008. "What Prompts the People's Bank of China to Change Its Monetary Policy Stance? Evidence from a Discrete Choice Model," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(6), pages 1-21.
    5. Nicholas R. Lardy, 2008. "Financial Repression in China," Policy Briefs PB08-8, Peterson Institute for International Economics.
    6. Dong He & Honglin Wang, 2013. "Monetary Policy and Bank Lending in China - Evidence from Loan-Level Data," Working Papers 162013, Hong Kong Institute for Monetary Research.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nicholas Borst & Nicholas Lardy, 2015. "Maintaining Financial Stability in the People's Republic of China during Financial Liberalization," Working Paper Series WP15-4, Peterson Institute for International Economics.
    2. Dong He & Paul Luk & Wenlang Zhang, 2016. "Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 295-323, August.
    3. repec:spr:fininn:v:3:y:2017:i:1:d:10.1186_s40854-017-0075-8 is not listed on IDEAS
    4. repec:wsi:jicepx:v:05:y:2014:i:02:n:s1793993314500033 is not listed on IDEAS
    5. Lodge, David & Soudan, Michel, 2019. "Credit, financial conditions and the business cycle in China," Working Paper Series 2244, European Central Bank.
    6. Guonan Ma & Robert N. McCauley, 2014. "Financial openness of China and India: Implications for capital account liberalisation," Working Papers 827, Bruegel.
    7. repec:ukb:journl:y:2018:i:243:p:4-20 is not listed on IDEAS

    More about this item

    Keywords

    Interest Rate; Monetary Policy; Economic Reform; Chinese Economy; The People¡¦s Bank of China (PBC);

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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