Shadow Banking: China's Dual-Track Interest Rate Liberalization

Wang, Hao; Wang, Honglin; Wang, Lisheng; Zhou, Hao

doi:10.2139/ssrn.2606081

Cited by 53 publications

(43 citation statements)

References 29 publications

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“…Ferri and Liu (2010) and Cull et al (2015) emphasize that the repressed interest rate bank loans are directed towards SOEs, to reduce their financing costs; thus, credit rationing or quantity regulation becomes necessary. Song et al (2011) and Wang et al (2015) point out the macroeconomic consequences of interest rate regulation combined with credit rationing: inefficient SOEs enjoy easy access to cheap but scarce bank credit, while more efficient private enterprises struggle for financing. Helea and Long (2011) and Dollar and Jones (2013) argue that this phenomenon is a key element of the Chinese economy.…”

Section: Literature Reviewmentioning

confidence: 99%

Completing China's Interest Rate Liberalization

Tan

Huang

2016

China and World Economy

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China's recent removal of the last ceiling restriction on deposit rates inOctober 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.

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Section: Literature Reviewmentioning

confidence: 99%

Completing China's Interest Rate Liberalization

Tan

Huang

2016

China and World Economy

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“…12 Bandiera et al (2000) argue that the ambiguous effect of financial liberalization on private saving is also due to the fact that the financial liberalization is a multi-dimensional and phased process, sometimes involving reversals. 13 For some other recent studies of China's financial system, and in particular, on China's shadow banking sytem, see Hachem and Song (2015), Wang et al (2016), Acharya et al (2017), Chen et al (2017).…”

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confidence: 99%

Interest-Rate Liberalization and Capital Misallocations

Liu

Wang²,

2020

ERWP

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Abstract. We study the consequences of interest-rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China's distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand production and easier access to credit than private firms. In this second-best environment, liberalizing interest rate controls improves capital allocations within each sector, but exacerbates misallocations across sectors. Under calibrated parameters, interest-rate liberalization may reduce aggregate productivity and welfare, unless other policy reforms are also implemented to alleviate SOEs' distorted incentives or improve private firms' credit access.

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“…In models by Plantin (2014) and Huang (2018), higher capital requirements lead to shadow banking, with financial stability affected via various channels. Borst (2013) and Wang et al (2015) attributed the rapid growth of shadow banking in China to interest rate regulation, which restricts the ceilings of deposit rates offered by banks to savers. Buchak et al (2018) quantitatively identified that regulation and fintech technology accounted for approximately 90 percent of the growth in mortgage lending, one important part of shadow banking in the US.…”

Section: Literature Reviewmentioning

confidence: 99%

“…China's interest rate control policy in the past decades has been characterized by effectively binding the deposit rate ceiling. Tan et al (2016) and Wang et al (2015) reviewed the recent financial liberalization process in China, including the milestone in interest rate liberalization in October 2015 that removed the last ceiling restriction on deposit rates. They pointed out that the de jure completion of interest rate liberalization has generated little impact on the financial system, as commercial banks still stick to the official benchmark rates set by the PBOC and the deposit rates have remained nearly the same as those before reforms.…”

Section: Literature Reviewmentioning

confidence: 99%

Do Interest Rate Liberalization and Fintech Mix? Impact on Shadow Deposits in China

Chan

2020

China and World Economy

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In this paper we attempt to characterize the stability of shadow deposits in China with interest rate liberalization and fintech developments. We emphasize that shadow banks provide higher but riskier returns and such characteristics affect the stability of shadow deposits. In our setting, the stability of shadow deposits is influenced by two offsetting effects, namely: the patience effect, which makes investors more willing to wait because of the potentially higher returns; and the uncertainty effect, which makes investors more likely to withdraw as a result of higher risk. Under liberalized interest rates, the patience effect will erode and the uncertainty effect will be heightened because the post‐liberalization higher return of traditional banks undermines the importance of the extra return of shadow deposits to depositors, while preserving the importance of the risk aspect. Fintech development is modeled as a reduction in the withdrawal cost that facilitates runs. This affects the stability of shadow deposits because of their wider fintech reliance. Regulators should be cautious in pushing interest rate liberalization and fintech application alongside building a safety net for shadow banking.

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Shadow Banking: China's Dual-Track Interest Rate Liberalization

Cited by 53 publications

References 29 publications

Completing China's Interest Rate Liberalization

Completing China's Interest Rate Liberalization

Interest-Rate Liberalization and Capital Misallocations

Do Interest Rate Liberalization and Fintech Mix? Impact on Shadow Deposits in China

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