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fin金融学代写 In conclusion, China’s interest rate structure has changed fundamentally after the interest rate liberalization.

Contents

1.Introduction…………………………………………………………………………………………1

2.Methodology………………………………………………………………………………………..2

3.Analysis………………………………………………………………………………………………2

3.1 Current Interest Rate Structure & Changes of Interest rates………………….2

3.2 China’s Interest Rate Liberalization…………………………………………………….5

3.3 The Determining factors of Policy Interest Rates…………………………………..5

3.4 The Determining Factors of Interest Rates in the Banking Segments…………………6

4.Conclusion and policy relevance………………………………………………………………………7

Reference………………………………………………………………………………………………………….7

1. Introduction  fin金融学代写

Due to China’s socialist market economy, China has a special economic and financial structure. Both private capitalists and entrepreneurs with public and collective enterprise exist in China. China is not a capitalist country because the party retains control over the direction of the country, maintaining its course of socialist development.

One of the most important part of China’s price reforms is interest rate liberalization. Although most goods and services are now market determined, there remain significant government controls on prices of the factors of production. (He et al., 2014)

Ceilings imposed by the People’s Bank of China on deposit rates are a notable binding constraint on price discovery in the financial markets. Even though interest rates in the money and bond markets and bank lending rates are now market determined in China, the levels and movements of interest rates are still constrained by the regulated deposit rates, because of to the dominance of the banking sector in overall financial intermediation.  fin金融学代写

Thus, the determinants of interest rate in China could differ from that in other countries. Understanding the determinants of interest rate in China, as well as the drivers of the changes in the interest rate would be valuable.

Thus, the following research questions have been proposed.

• What’s the current interest rate structure in China?
• How has the interest rate changed over the years in China?
• After China’s interest rates liberalization, how has interest rate changed in China?
• What is the country-specific influencing factors of exchange rates in China?

2. Methodology

To answer the research questions proposed, the main methodology would be literature review of the current studies. Besides, data of the changes of exchange rate in recent decades would be used to understand the current situation. Moreover, the changes in potential influence factors would also be analyzed.  In He et al.’s paper (2014), the changes of interest rate before and after interest rate liberalization were discussed. In Hong et al’s paper (2020), the effect of the Chinese interest rate liberalization, as well as the changes in interest rates after the interest rate liberalization were analyzed. In Kim and Shi’s paper (2018), the determining factors of China’s benchmarked interest rates were discussed.

3. Analysis

3.1 Current Interest Rate Structure & Changes of Interest rates

There has been substantial progress for china to develop the market-oriented interest rate system in the past 30 years. It is estimated that around 120 interest rates have been liberalized (Yi, 2009). Up until 2008, only 24 intertest rates were left unregulated (Yi, 2009). Currently, there are four types of interest rates structure in China.

Firstly, there is interest rates for the operation of China’s central bank. During the period of planned economy, government is responsible for the planning of allocating financial resources, so central bank set all the interest rates. A system called “centralized deposits and credits” was used by People’s Bank of China, which is the only bank during that period, to manage funds. As the financial reforms happened in the 1980s, the commercial banking system was established, and several large government-owned banks dominated the banking system. So, in 1984, People’s Bank of China started to operate as a central bank exclusively. It created several interest rates for the conduction of monetary as well as financial stability policies. A series of other quantitative instruments, like loan quotas and reserve requirements, were also used to control the banking system.

There are three types of interest rate for the operation of People’s Bank of China.

first of all, there are lending rates of refinance facilities, which includes central interest rate for bank relending, rediscount, as well as Standing Lending Facility.  Secondly, there is deposit rates of reserve, including both excess reserves and required reserves. Thirdly, PBC sets the interest rate for open-market operation. Lastly, the repo rates and bill rates of central bank are also part of the interest rate system, which are critical for guiding the market interest rates to the desired degrees.  The changes of discount rate well as reserve rates from 2000 to 2014 is shown in graph 1.  fin金融学代写

Secondly, banking products’ interest rate is part of the interest system in China.Governments regulate deposit rates in the banking segment by imposing ceilings administratively. The lending rate floors were only removed in 2013. Graph 2 shows the deposit rates in China. Different maturities have different deposit rate ceilings as imposed by the People’s Bank of China, with the aim to control the term structure in China. The interest rate ceilings are powerful for anchoring the entire interest rate system, as well as affecting the interest rates in the market. (He and Wang 2013) For commercial banks, the major source of funding is deposits.

Thirdly, there are also money and bond market interest rates. In 1980, China established its interbank lending market.

In 1996, with the establishment of the first unitized trading platform in Shanghai, to surveil the interbank trading activities, the China Interbank Offered Rates was established. In 1997, the repo market was replaced by the repo market, and the repo market soon became the main source for short-term liquidity. With the fast growth of the repo market, there was also increasing needs for reference rates. In order to price the price instruments in the money-market, the repo fixing rates were compiled for different types of tenors. Due to the high turnover, the repo fixing rates have become a powerful benchmark for the interbank market.

Lastly, there are also interest rates for other types of financial markets. There have been more off-balance-sheet actives as well as the shadow banking activities in China’s financial system in recent years, which is a significant progress. The need for circumventing interest rates regulations as well as the demand for more investment types are seen as the incentives for this progress. In the shadow banking segment, although market destines the interest rates, the regulations of deposit rate constrained the interest rates. Even though wealth-management products interest rates are more volatile, they are closely related with formal deposits interest rates. On the other hand, different from shadow banking interest rates, informal credit rates are more non-transparent and tend to be higher.

3.2 China’s Interest Rate Liberalization  fin金融学代写

The interest rate liberalization is the policy paradigm shift regarding the interest rate. Before the interest rate liberalization, China’s finical system is tightly controlled by the government, where monetary policies were set by the People’s Bank of China according to quantitative targets of the states, including quotas for loan. After the interest rate liberalization, China was shifted to the market system, where interest rates are determined by market factors. (Liu, 2017)

In the market economy, the rate policy in central banks would mainly anchor the short-term interest rates, while market forces would largely determine the longer-term interest rates, adjusting based on term as well as risk premium.

It is believed that the framework of People’s Bank of China would also converge to this pattern eventually. Even though the process could take a long time, understanding factors that could affect the analytical thinking of People’s Bank of China for the determination of the policy rate would be useful. ((“Interest rate liberalization and economic and financial development,” 2018)  fin金融学代写

From the operation perspective, in order to control and affect the interest rates in the market, People’s Bank of China would utilize its own balance sheet’s composition and size, rather than using that of others to regulate interest rates, which is a fundamental change.

Besides, People’s Bank of China could also set targets for short-term and medium-term interest rates as a temporary measurement. Since the bond markets would still need some time to become mature and the development of a market-determined yield curve would also take time, People’s Bank of China would also try to manage the yield curve shape by imposing interventions directly in the bond markets.

3.3 The Determining factors of Policy Interest Rates  fin金融学代写

After the interest rate liberalization, the outline of the monetary policy framework has not been revealed by People’s Bank of China has not yet articulated in public. It is estimated that, it is likely that the monetary policy framework would involve targets setting for short-term interest rates through open market operations in the money markets. One of the simple analysis tools to understand China’s monetary policy could be the Taylor rule. According to the Taylor Rule, the adjustment of the policy rate is linked with the natural rate of interest. (Hong et al., 2020)  fin金融学代写

3.4 The Determining Factors of Interest Rates in the Banking Segments

In an interest rate system that is entirely liberalized, the interest rates for small deposits tend to be lower, while the interest rates for huge deposits as well as certificates of deposit will be higher, because the costs for wholesale funding would be tracked.

When there is effective market arbitrage, the policy rates in central banks would anchor the interest rates in the money market, as well interest rates on large bank deposits and certificates of deposit. It is estimated that, according to the natural interest rate, bank deposit rates would tend to become higher when there are no constraints on the binding ceilings. Actually, the majority of the commercial banks increased the deposit interest rates to be close to the ceilings after the People’s Bank of China ‘s announcement of the increase in the deposit ceilings in 2012. As a result, after the interest rate liberalization, the changes of lending interest rates would depend on three factors, the contestability of the banking industry, loan quota as well as competition of direct finance and foreign investments. (Kim & Shi, 2018)

Firstly, the contestability of the banking industry would be the main determining factors of the interest rate.

Because the effective funding costs of the banking segments have been increased after the interest rate liberalization, commercial banks may be able to charge higher costs from their clients given that they have enough market power. As a result, the borrowers have to accept a higher effective interest rates for lending.  (He et al., 2014)

Secondly, whether the People’s Bank of China choose to continue imposing the aggregate loan quota, as well as whether the loan quota remains binding would determine the lending interest rates. If the loan is still binding, then the quota as well as aggregated demand of loan would determine the lending interest rates.  fin金融学代写

On top of the first two factors, the competition of direct finance as well as foreign investments would affect the interest rates. If there is major development in the bond market, and more companies are willing to use bond market as the sources for financing, or China allows foreigner lenders to lend to domestic companies, the lending rates would be lowered by commercial banks in order to win the in the competition.

4. Conclusion

In conclusion, China’s interest rate structure has changed fundamentally after the interest rate liberalization. Now, there are four parts in the interest rate structure: is interest rates for the operation of China’s central bank, banking products’ interest rate, also money and bond market interest rates, as well as interest rates for other types of financial markets. As a result, after the interest rate liberalization, the changes of lending interest rates would depend on three factors, the contestability of the banking industry, loan quota as well as competition of direct finance and foreign investments.

Reference  fin金融学代写

He, D., Wang, H., & Yu, X. (2014). Interest rate determination in China: Past, present, and future. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2398801

Hong, H., Bian, Z., Chen, N., & Su, C. (2020). Does interest rate liberalisation affect the constancy of mean interest rates in China? Journal of Financial Regulation and Compliance, 28(4), 555-568. https://doi.org/10.1108/jfrc-10-2019-0129

Interest rate liberalization and economic and financial development. (2018). Market-Based Interest Rate Reform in China, 93-124. https://doi.org/10.4324/9780429469183-4  fin金融学代写

Interest rate reform: Full or partial liberalization? (n.d.). Shadow Banking in China, 297-317. https://doi.org/10.4337/9781784716776.00019

Kim, H., & Shi, W. (2018). The determinants of the benchmark interest rates in China. Journal of Policy Modeling, 40(2), 395-417. https://doi.org/10.1016/j.jpolmod.2018.01.012

Liu, K. (2017). China’s interest rate pass-through to commercial banks before and after interest rate liberalisation. Economic Affairs, 37(2), 279-287. https://doi.org/10.1111/ecaf.12233

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