Research On The Retardation Factors To Interest Rate Polocy In China

Interest rate polocy exists as one part of monetary policy system. In the recent years, People's Bank of China has paid more attention to interest rate policy and the tools, and increases the utilization frequency and flexibility. With the gradual development of China's reform on interest rate liberalization, as one important economic lever, interest rate will play a more crucial role in the China's macro-control system. However, the validity of interest rate policy in China is still limited to some extent because of a great deal of negative factors which block the transmition process of interest rate.The foundation which the interest rate policy functions and influences on the macro-economy is the monetary flow quantity, and in the process of interest rate transmition, the monetary velocity is supposed to change the monetary flux in the entire society, so we can call interest rate policy as flux monetary policy. The tools with which People's Bank of China adjusts GDP and CPI are consisted of benchmark interest rates that root in the re-lending, rediscoun, deposit reserve and excess reserve, deposit and lending interest rate of financial institutions, fluctuation range of deposit and lending interest rate of financial institutions, and interest rate structure and levels. This paper defines the"negative factors"as all those"Retardation Factors"which might block or retard the validity of interest rate policy's adjusting macro-economy function. The retardation factors might not only derive from economic system, but also come from the financial markets and the behaviors of micro-principal part such as the enterprises and citizens.The western theories on the interest rate policy mostly were based on the product markets and financial markets with the perfect functions and excellent efficency, and these hypothesises were in accord with the economy status of both America and UK in 1930s, however, the conditions in the developing countries are very different from that. So when we study on China's interest rate policy and its validity, the special characteristis of the instituions, markets and behaviors in China which might give birth to those complex retardation factors to interest rate transmition should be analyzed and investigated very carefully, and then the effective suggestions can be brought out to overcome the disadvantages.The current retardation factors to interest rate policy in China are compose of three kinds as follows:Firstly, the retardation factors are derived from the process of economic system transformation in China.(1) In an opening-up economy, the exchange rate policy and the opening-up of capital account can affect a lot on the validity of interest rate policy. According to the current conditions in China, the interest rate policy had worked well for many years since 1978, but after being a member of WTO in 2001, the range of opening up of capital account have been enlarged year by year, and reform on exchange rate on Jul. 21, 2005 increased the fluctuation space of RMB'exchange rate, as a result, the validity of interest rate policy has been shaked and is becoming very insufficient.(2) In the period of the economic system transformation in China, the transmition route of interest rate is not smooth which cannot meet the need of market economy. Furthermore, the complexity and diversity of conditions existing in the period of the economic system transformation result in the low interest rate elasticity of savings and investments.(3) The current governing system on the interest rate in China also blocks the validity of IRP (interest rate policy). From the reform and opening-up in 1978 to present, The governing system on the interest rate has experienced much changes and evolution, and now it is transiting between the strict governing stage and liberty stage. However, the interest rates of deposit and lending in financial institutions in China are still controlled by the national central bank, so that the price embodied in the benchmark interest rate of the People'Bank of China cannot be absorbed efficiently and sufficiently by financial institutions, and further by enterprised and citizens, and the validity of IRP gets inhibited.Secondly, the retardation factors are derived from the financial markets including monetary market and capital market in China.(1) The monetary market where the national central bank gathers market information and makes IRP based is definitely the ligament connecting the benchmark interest rates to the capical market. During the about two decades after 1978, China had developed with great priority the capital markets such as government bond markets, security markets in order to get the sufficient funds to support economic growth, which resulted in the lag evolution of monetary. The retardation factors deriving from monetary market in China are consisted of the imperfect circumstance of monetary market, the poor components of participants and tools, and nonequilibrium growth of sub-moneytary markets.(2) The capital markets play the crucial role in the process of IRP transmition and function as the important carrier for the price information of interest rate. The capital markets face the more far-ranging micro-principal parts comparing to the monetary markets, through which the IRP can diffuse and act on the enterprises and citizens. The retardation factors deriving from capital markets in China are figured out as follows: the irrational structure of principal parts participating into the markets, the nonequilibrium distribution of financial assets, the low integration between monetary markets and capital markets.(3) the circulation velocity of monetary decides the validity of IRP to some extent. Because of the insufficient competition system in the financial markets, there are plenty of negative factors including the monetary representation of economy, the change of industrial structure which will block the efficient transimition of IRP.Thirdly, the retardation factors are derived from the micro-principal parts including enterprises and citizens in China.(1) The low independency of the national central bank and the defective transparency of IRP have retarded the validity. On the one hand, the People'Bank of China cannot decide the indepent IRP which only considers the stability of money because the national central bank have been enslaved to the government and other macro-control objectives, as a result, the independence of IRP will be depressed and the validity is accordingly low. On the other hand, the transparency of IRP is same improtant so that the micro-principal parts can make the rational expectation to the policies and adjust their saving, consumption and investment choices. However, the retardation factors including the structure factors in the policies'transparency and the route factors have some negative effection on the validity of IRP.(2) The credit channel of commercial banks in China lack of smooth characteristics is another negative aspect for the IRP. We demonstrate the negative effection as follows: the imbalance of lending structure and the credit cycle in commercial banks restricts that the IRP make more function; the natural kin relationship and substantial property right connection between commercial banks and the national central bank decrease the independence of the People'Bank of China; the adverse election and moral hazard between commercial banks and enterprises have distorted the normal transmition of market interest rate.(3) The abundance micro-principal parts that make up the foundation of economy will retard the validity of IRP by the irrational and disaccord expectation. Nowadays, on the one hand, the over-release of consumption of citizens which have been accumulated during the past years counteract the function of increasing of benchmark interest rates by the national central bank, as well as the investment of estate assets and financial assets. On the other hand, the enterprises have expanded the scope of direct financing with great blindness and investment impulse, which also counteract the effection increasing of benchmark interest rates by the national central bank. What is more, the irrational and disaccord expectation of micro-principal parts also block the validity of IRP.According to the study above, we devide the retardation factors into three kinds which definitely act on each other as follows: the institutional retardation factors, the marketable retardation factors and behavior retardation factors. There are some simple conclusions as follows: (1) the validity of IRP in China since 1992 is low to some extent; (2) the effections of IRP on the GDP and CPI has been depressed year by year; (3) the real deposit interest rates are not the most crucial factors which function on the fixed asset investment; (4) the time lag exists in the IRP in China, and the macro-control tools cannot get effection instantly.Regarding the positive experience of developed financial markets in America and Japan and so on, we brought out several suggestions which will help overcome the retardation factors of interest rate policy in China and improve the validity. First, the government should promote the course of the reform of economy system; second, the financial markets including monetary markets and capital markets should get further development and evolution; third, the micro-principal parts should be encouraged to behave more positively to react on the interest rate policy.