China & World Economy / 1–22, Vol. 24, No. 2, 2016

Completing China’s Interest Rate Liberalization

Yuyan Tan, Yang Ji, Yiping Huang*

Abstract

China’s recent removal of the last ceiling restriction on deposit rates in October 2015 is a milestone in interest rate liberalization, but not the end of it. International experience suggests that, without structural and quantitative reforms, simply freeing interest rates can result in major financial stress. Before China’s central bank can completely relinquish implicit or explicit guidance for commercial banks’ interest rate determination, it needs to accomplish two tasks: improvement of commercial banks’ pricing capability as well as the monetary policy transmission mechanism. Both tasks require significant reform measures to be initiated, such as enforcing market discipline, forming a new monetary policy framework, developing money and capital markets, abandoning quantitative restrictions on credit and reforming the financial regulatory system.

Key words: dual-track financial system, interest rate liberalization, quantity and structural reforms
JEL codes: E26, E44, G18