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Requiem for the Interest-Rate Controls in China

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  • Sun, Rongrong

Abstract

This paper reviews the retail interest-rate-control deregulation in China over the 1993-2015 period and provides a preliminary assessment of the PBC's replacement monetary framework. I show that 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 deterioration of bank profits and build-up of financial frangibility, which have pushed up the PBC's deregulation acceleration over the post-2012 period. I quantify the distortionary effects of these controls: disintermediation, a rising shadow banking system and financial repression. Despite the official lift-off of the controls, the retail interest rates are still subject to the PBC’s window guidance and other pricing mechanism guidance. The interest-rate corridor does not function well in confining money market rates. This suggests that the PBC adopt a target money market rate system.

Suggested Citation

  • Sun, Rongrong, 2018. "Requiem for the Interest-Rate Controls in China," MPRA Paper 87700, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:87700
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    1. Klingelhöfer, Jan & Sun, Rongrong, 2019. "Macroprudential policy, central banks and financial stability: Evidence from China," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 19-41.
    2. Sun, Rongrong, 2020. "Monetary policy announcements and market interest rates’ response: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    interest-rate control; deregulation; China; financial repression; interest-rate corridor;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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