A Study On Interest Rate Marketization In East Asia

Financial liberalization has sweeped the world in the last30years of the20thcentury, and interest rate marketization was the most central reform in this wave ofliberalization. During those30years, many contires and regions from different levelsof development has practised the reform of interest rate maketization, and receivedtwo very different kinds of results. Developed and emerging economies generallysucceed in the reform, and improved theire domestic economy effectively. While indeveloping economies, some got succeed in the reform of interest rate marketization,and the others failed. Thus, though the objects and tasks are similar, the results aredifferent in each economy, which means there are lots of problems in the reform tocontrol. If one economy could resolve these problems, its whole economy wouldbecome better; if not, its financial market may be a drag on its whole economy. Inorder to select the more representative objects for the study, this article takes focuson the East Asian economies, including Japan, Korea, Taiwan Province, Singapore,Thailand, Malaysia and Indonesia. By studing these seven economies' interest ratemarketization, we find the similarities and differences, which provide a usefulreference for China's reform.In this article, historical and comparative analysis methods are used to researchthe reform of interest rate marketization. The study finds four common grounds inEast Asian economies' interest rate marketization. Firstly, the motivations are similarduring these econmies. Strict contrl of interest rates in the pre-reform constrained thedevelopment of economies, market needs efficiency and fairness. In order to meetthese objective requirements, goverments of East Asian had to adopt market-orientedinterest rate reform measures to adapt to economic development. Secondly, reform ofinterest rate marketization is good for macroeconomic stability. It can be seen form the changes of average annual growth rate of real GDP in each economy that thedevelopment before and after the reform are steady. Thirdly, reform is good tocontrol inflation in East Asian economies. After the reform of interest ratemaketization, the economies' inflation rate were lower in the pre-reform pierod, andstayed steady unless some special years. Forthly, reform is propitious to the financialmarket development of East Asian economies. It can improve the competitive abilityof financial markets, and it can also bring more financial innovations. The wholefinancial system could be better because of the reform.Due to the economic and policy environment are different in these7economies,there are some differences in their reforms of interest rate maketization. The firstdifference is that the macroeconomic environments vary. Macroeconomicenvironment before reform are steadier in Japan, Korea, Taiwan Province andSingapore. They have a more substantial economic accumulation to build relativelycomplete system economies. Macroeconomic environment were not steady enoughbefore the reform of interest rate marketization in Thailand, Malaysia and Indonesia.They didn't have enough accumulation and were weak in financial system. Thesecond difference is East Asian economies had different practice modes of interestrate marketization. The reforms of interst rate marketization in Japan, Korea, TaiwanProvince, Thailand and Malaysia have lasted10-20years, belonging to the gradualmodel. Reforms in Singapore and Indonesia are much shorter, belonging to theradical model. The third difference is that economic effects of interest ratemarketization are different among East Asian Economies. Macroeconomy fluctuatedin Japan, Korea, Thailand and Indonesia after the reforms of interest ratemarketization. But macroeconomy developed steadly in Taiwan Province, Singaporeand Malaysia after the reforms.By analyzing the similarities and differences of East Asian economies' interestrate marketization, there are three experiences and lessons. Firstly, the timing ofinterest rate marketization is related to the successes and failures of the reforms.Reforms in Korea and Malaysia prove that it is not a wise choice to take the reform of interest rate marketization when macroeconomic situation is not ready. Theimposition of reform will only cause further deterioration of the macroeconomy,cause interest rate fluctuate in a short time, lead price level unreasonable fluctuateand force the government to re-control the fiancianl market. Reforms in TaiwanProvince and Singapore prove that favorable macroeconmic environment isimportant to the success of interest rate marketization. Secondly, the interactionbetween interest rate marketization and financial innovation is closely related to thesuccess of the reform. The reform of interest rate marketization will promote theinnovation of financial products, and financial innovation will promote the reform inturn. Thirdly, the harmonization of interest rate marketization and financialsupervision is relative to the effects of this reform. Governments of Singarpore,Taiwan Province and Malaysia take full implementation of supervision to the market,and help their reforms have smooth processes and effects. While the lack ofgovernment supervision in Japan and Korea plant the hidden crisis in their financialsystems.China began its formal implementation of interest rate marketization reform inthe year of1996. Inter-bank leading rates first got released; interest rate of inter-bankbond and paper market got released next. Depending on these measures, capitalsupply and demand has been effectively improved in China. At the same time,deposit and lending rates marketization follow the step of from large-sum transationsto small-sum trasactions, from foreign currency to local currency, from loan todeposit. At present, the reform of interest rate marketization in China has completedmost of the content. The next key issue locates in the area of deposit and lendingrates. The inner logic of China's reform of interest rate marketization is incrementalreform, which is consistent with the characteristics of China's economic reform. Thenew force outside the system makes a detour to rebuild the old system. The effects tomacroeconomic saving, consumption and investment did not come to the force inChina's reform. Changes in interest rates on saving, consumption and investment arenot obvious. The causes of these phenomena are the incomplete of the reform and the special situation of domestic and international economic. Future reform in Chinawill focus on the release of deposit interest rate ceiling, lending rate lower limit andbuilding an effective system of benchmart interest rate. The key problem of the nextreform is to improve the reform-related support mechanisms, such as marketcompetition mechanism, product pricing mechanism, supervision and managementmechanism, and social opinon mechanism.