A Study On The Interest Rate Liberalization And Its Policy Effects In China

Emerging developing countries in the early stage of economic take-off are beginning to explore the country's financial market liberalization from the financial sector reforms., As an important price indices, interest rates are ultimately set to achieve financial market liberalization. For China, financial sector reform first attracted our attention. China's financial division-the state-owned economy and the state-owned banks, some non-state economy, such as collective economy and local government financial support, some non-state economy and the private financial markets, results in inefficient capital resource allocation. Many of China's market research on interest rate liberalization start from the path selection, risk management, banking system, policy considerations. However, relatively rare literatures pay attention to measuring interest rates and market factors effectiveness. This article attempts a preliminary study from these perspectives.Financial liberalization need to co-operate with the same level of economic development, the financial position of the government or state-owned enterprises, the degree of capital accumulation. Focusing on the practice of China's opening economy, we will put a global perspective on financial liberalization. Interest rate market and the effectiveness of interest rate policy are closely linked because of direct impacts. Not only the interest rate market affects the effectiveness of interest rate policies, but also the latter has an important impact in the former.This article firstly reviews theories of financial liberalization and effects of interest rate policy, summarizes experiences of financial liberalization in U.S. and some other countries and districts, and further analyzes the reality and obstacles of financial liberalization in China and predicting the future of possible progresses in such process. And then we analyze the transmission mechanization of interest rate in China by facilitating numerous time series data and Factor Augmenting Vector Autoregression Model, analyzing the relationships between interest rate and macroeconomic variables. At last, we analyze the interest rate liberalization and its effects from aspects of monetary, loan and investment.By summarizing experiences of interest rate liberalization in U.S. and other countries and districts, we found that, gradual reform will avoid sharp fluctuations in the economy. Financial liberalization would increase the system risk, which means financial regulation is necessary. Financial liberalization needs the support of fiscal policy and stable macroeconomic environment. Related institution with interest rate liberalization would be needed and cooperate with proper terms of interest rate liberalization.Interest rate liberalization in China is based on the theory of financial restriction in emerging countries. By flows development of private economies and private financial department, state-owned economies and state-owned financial department have to take steps to adapt this change. Frustrations in interest rate liberalization in China are the results of lagging behind of financial department compared with the development of economy structure, and abnormal lending relationship between enterprises and banks and lastly the dislocation of financial regulation which leads to rent-seeking in lending market.At this stage, interest rate policy are not so mature to control prices but gradually effective in China. And its effects to money supply grow by steps. All these findings give evidence of interest rate gradually works. However, for the reason of long term regulation of exchange rate, interest rate liberalization brings about the irrational performance of financial markets. As positive impact on interest rate gradually reduced to zero after some periods, we know that irrational investments in financial markets are weakening.Interest liberalization rate in China can not be achieved at the moment, but need to gradually sum up the experience of other countries and districts, steadily push forward interest rate liberalization. In order to further improve market-based pricing of financial products, which play a role in the regulation of interest rates, we need to make full use of credit information system, project evaluation reports, the benefits to the bank customers, credit risk, lending period, the size of risk, financing costs, operating cost, competition with other aspects of information to achieve the reasonable pricing of financial products, the establishment of a stable pricing system to control bank risk, etc.. On the other hand, financial regulatory authorities should gradually liberate the credit control. Supervision and regulations are needed to speed up the relevant rule of law, as well as establishing a sound legal system, financial market regulation, interest rate liberalization for sound legal supports. In addition, we need the establishment of scientific and reasonable social credit system, credit strengthening, increasing default costs, strengthening supervision over enterprises and improving the incentive and restraint mechanisms. To gradually improve the securities market, we need to prevent excessive and irrational investment behavior contrary to the principles of market trading behavior. Finally, expanding the scope of exchange rate fluctuations is necessary. Exchange rate fluctuations make the absorption of the external economy effective, including large-scale foreign capital inflows and outflows. At last, we can achieve a dual purpose of economic growth and stabilization.