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Description

What might interest rate liberalization do to intermediation and the cost of capital in China? China's most binding interest rate control is a ceiling on the deposit rate, although lending rates are also regulated. Through case studies and model-based simulations, we find that liberalization will likely result in higher interest rates, discourage marginal investment, improve the effectiveness of intermediation and monetary transmission, and enhance the financial access of underserved sectors. This can occur without any major disruption. International experience suggests, however, that achieving these benefits without unnecessary instability, requires vigilant supervision, governance, and monetary policy, and a flexible policy toolkit.

Keywords

Financial Liberalization, Financial Deregulation, Interest Rate Liberalization, Banking, Banking Sector, Banks, Credit Controls, Credit Demand, Economic Models, Financial Intermediation, Interest Rates

Taxonomy

Banks and banking, Capital markets, Economic policy, Financial institutions and markets, Loans, Monetary policy

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More publications in this series: Working Papers

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More publications by: Nathaniel John Porter ; Elöd Takáts ; Tarhan Feyzioglu