Monopolized Banking Market Structure And The China Exchange Rate Market

The establishing of a market-based interest rate system has become one of the most popular topics in Chinese financial sector. It's also attracting many attentions from the academia. As a symbol of a liberalized financial system, it is one of the goals of Chinese financial reform that the interest rate should be determined by market totally. But the process of interest rate reform meets many difficulties, including the unconcern of market, especially in the banking system. The banking system is a important part of the financial market and links tightly with the interest rate reform. The establishing of a market-based interest rate system is discussed and reconsidered by this paper from a banking market structure angle. The point is to show the relationship between a monopoly banking system and the interest rate liberalization so that the reason why a slow procedure of interest rate reform is underwent by China could be explained.This paper first reviewed the history of the changing of the banking market structure and the progress which had been gained by the interest rate reform from 1990's. We found that the monopoly in banking industry was existing from the beginning to now. Based on the analysis on the C4 or HHI data, we also came to the conclusion that the bank industry in China was still monopolized by several large banks. Meanwhile, the process to establish a market-based interest rate system has been going in the passed 20 years, but the final intention has never been achieved. Several key point such as saving or loan interest rate is still partly controlled by the central bank.The financial policy system during the economy shifting process in China is based on the financial restraint theory which induced a monopoly banking industry. Due to the inertia of a policy series, the market structure of the banking system will remain monopoly in the far future. Another reason is that the shifting of structure in both sectors and industries is a long term task for most of the countries.On this basis, this paper analyses the conflict that the monopoly in banking market is un-adjustable in short term while the establishing of a market-based interest rate system is urgent. We believe the monopoly in banking sector affects the interest rate liberalization process both positively and negatively, but the negative infection is more powerful. Through Demand-Supply analyze, we also indicated that if monopoly in bank market could not be managed properly during interest rate reform procedure, it would cause reducing during economic growth period and make the reform procedure less effective. The history of interest rate reform in other countries also supports the conclusion above, but a more competitive market intend to improve and accelerate the reform procedure. So, all of the government, the market and the people should give more patience to the reform in China. The best choice is: the reform and the market structure adjustment should carry into execution the same time. Any attempt to carry on a thorough liberalization on interest rate before a competitive market structure is available will cause unpredictable damages to our economy.This article includes five sections. The first section introduces thesis topics on the background, related concepts, research progress and research framework. The second section reviews the history and calculated current market structure status. Section Three analyses the policy of the government which brings the monopoly in banking sector and point out that it cannot be changed shortly. Section Four discussed the relationship between interest rate reform and banking market structure, and then put forward several suggestions to the policy maker. Section Five is the conclusion of this article.