Interest Rates Liberalization or Economy Control: The Case of the Chinese Banking System

Abstract

The Chinese Central Bank decided on June 8 and July 6, 2012, on the duplication and consecutive cut of the deposit and loan interest rates, together with the simultaneous loosening of the interest rate floating range of their financial institutions. Unquestionably, these measures resulted in a drastic change of the operating strategies of the whole banking system, for both nationalized and the private commercial banks. The article follows up on the causes and effects of these decisions in the Chinese banking arena, predicting a higher possible level of bad loans and followed by a higher systemic risk due to the three major banks’ reactions and copy-cat decisions in fixing interest rates. The research methodology uses the GARCH (1,1) model and the VaR to identify the way the interests are adjusted and study if this decision indicated a real liberalization or rather a controlled interest rate change by the authorities. Eventually, the Chinese interest rate liberalization brought good and bad news to the economy, while the essence remains in how such liberalization is handled and what is intended for the entire economy.