Interest Rate Liberalization Research Articles

Interest rate liberalization and corporate innovation: Evidence from natural experiments in China

AbstractWe examine whether and how interest rate liberalization affects corporate innovation in China. Using the removal of the interest rate ceiling and floor as exogenous shocks, and the numbers of granted patents to proxy for corporate innovation, we find that corporate innovation increases after interest rate liberalization. Our finding holds through several robustness tests. Furthermore, we show that state‐owned enterprises (SOEs) and non‐SOEs benefit from interest rate liberalization differently: Non‐SOEs benefit more from interest rate ceiling removal, whereas SOEs benefit more from interest rate floor removal. Cross‐sectional analyses also show that the effect is more pronounced when bank competition is higher and when firms rely more on external finance. Exploring potential channels through which interest rate liberalization spurs innovation, we find that although ceiling removal mitigates firms’ financial constraints, floor removal lowers corporate loan costs. Our study provides evidence of how financial reform benefits the real economy.

Interest rate liberalization and household investment in China

In this study, we investigate the impact of interest rate liberalization on household investment behavior in China using data from the China Household Finance Survey from 2011 to 2019. We find that financial liberalization significantly increases the likelihood of households participating in financial markets and raises their holdings of riskier assets, driven by the wealth effect. This effect is more pronounced among higher-income, higher-asset, and better-educated households, without housing mortgages, as well as urban households. Our results highlight the importance of financial liberalization policies and provide new perspectives on the “limited participation puzzle” documented in emerging economies, where relatively few households actively invest in financial assets despite high expected returns. This study underscores how interest rate deregulation incentivizes household portfolio reallocation and promotes financial inclusion across socioeconomic groups.

Stability and economic performances in the banking industry: The case of China

We estimate stability performances in the Chinese banking industry over the 2007–2017 period using four risk indicators under nonparametric modelling. We are the first to calculate the risk indicator shadow prices, and we use a new way of studying the relationship between stability and economic performance. In particular, we reexamine stability performances when banks achieve their best economic performances. This questions the existence of stability rents, which form a prime reason for the banking authority to consider economic performance. Finally, we verify whether ownership has an impact on our results and investigate the role of the interest rate liberalization reforms.

Interest Rate Volatility and Economic Growth in Nigeria: New Insight from the Quantile Autoregressive Distributed Lag (QARDL) Model

AbstractThis is a study on interest rate volatility, a crucial form of volatility which affects local and foreign investments in the real and financial sectors. Whether to prioritize interest rate stability to prevent distortions in the market mechanism or to prioritize other macroeconomic objectives while allowing interest rates to independently react to market forces is a key question for Nigeria’s apex monetary authority. Answering this question is the primary motivation for this research. This paper is an attempt to establish the effect of interest rate volatility on economic growth and further conclude on the suitability of the financial liberalization policy in Nigeria. To reach an evidence-based conclusion, the paper analyzes the relationship between interest rate volatility and economic growth in Nigeria for the period 1981–2020. The QARDL procedure was employed to establish the short-run and long-run quantile-specific impacts of interest rate volatility. As a final step, Granger causality tests are conducted to investigate the predictive powers of the variables. It is discovered from the econometric analysis that interest rate volatility adversely affects the economic performance of Nigeria in both the short run and long run. Consequently, full liberalization is not suitable for the economy. Moreover, we find that the short-run adverse growth effect of interest rate volatility is greater when the economy is already in a relatively weak state, whereas the long-run adverse growth effect is greater when the economy is already in a relatively strong position. The findings sufficiently prove that full interest rate liberalization is not Pareto efficient for Nigeria. Hence, greater supervision of the interest rate corridor system to reduce volatility in the rates and minimize chances of persistent upward or downward bias is advised. Study limitations and directions for further research are also provided.

Interest rate liberalization and the stability of the Chinese banking system: Exploring chained mediation effects of deposit competitiveness and wealth management products

This study uses quarterly unbalanced panel data of 46 commercial banks and adopts a two-step system generalized method of moments to inspect the direct and indirect effects of interest rate liberalization (IRL) on banking stability from 2015 to 2021 in China. The results show that IRL enhances banking stability and brings deposit competition among banks, which affects banking stability. Meanwhile, wealth management products (WMPs) with higher market-based yields have increased dramatically as competitive substitution of deposits. The bootstrap test confirms the chained mediation effects of deposit competitiveness and WMPs development on the relationship between IRL and banking stability.

Does interest rate liberalization affect corporate green investment?

This paper investigates the impact of interest rate liberalization on corporate green investment by taking the cancellation of the lower limit of the loan interest rate of financial institutions by the People's Bank of China in July 2013 as an exogenous quasi-natural experiment. We find that the interest rate liberalization will boost corporate green investment. Specifically, for every one standard deviation increase in interest rate liberalization, the enterprise green investment intensity increases by 9.6% of the sample standard deviation on average. Moreover, underlying mechanisms show that interest rate liberalization reform can improve corporate green investment by easing financing constraints, improving market competition, and reducing business risks. In addition, the impacts are more profound on enterprises facing higher environmental supervision intensity, lower attention of capital market, higher degree of regional marketization, and lower degree of financialization. Extended analysis show that interest rate liberalization will further promote the substantive innovation of green technology and improve environmental performance after enhancing the green investment of enterprises. This study contributes to playing the role of financial services in the green transformation of the economy.

Analysis of the impact of the COVID-19 lockdown on financial technology (FinTech), interest rate liberalization (IRL) and commercial banks’ risk-taking: Chinese empirical evidence

ABSTRACT Financial Technology (FinTech), which drove changes in the financial business landscape during COVID-19 May 2001also contribute to Interest Rate Liberalization ( IRL ) and increase risk-taking by commercial banks. Therefore, it is important to analyse the impact of FinTech and IRL on risk-taking behaviour, and to examine whether the development of FinTech will hinder IRL. To analyse the complex relationship between FinTech and commercial banks under the COVID-19 lockdown, reduce the possibility of systemic risk outbreak in the banking industry, based on the data of 34 commercial banks in China from 2008 to 2022, this paper empirically tests the impact of FinTech and IRL on risk-taking of commercial bank under the COVID-19 lockdown. Under the impact of the COVID-19, IRL has pushed up the risk of commercial banks, which is not conducive to the stability of the asset-liability structure of commercial banks. Second, there is a U -shaped relationship between FinTech and risk-taking, that is, the risk-taking level is reduced at the beginning of the development of FinTech, and then increased. Third, under the impact of COVID-19, the development of FinTech has accelerated the process of IRL , intensified the price competition of commercial banks, and further pushed up the risk-taking levels.

Chinese monetary policy spillovers on its international portfolio investment flows

This paper examines Chinese monetary policy spillovers on its international portfolio investment flows with a factor-augmented vector autoregression (FAVAR) model. The paper extracts a FPI factor from certain time series to measure monthly foreign portfolio investment flows (FPI). Four Chinese monetary policies are considered: central-bank target policy rate; required reserve ratio; M2; banks' loans. The robust and significant results show that interest rates and banks' loans have significant impact on Chinese international portfolio investment flows, while changes in reserve requirements are not effective. It reveals the increasingly important effects of Chinese monetary policies on its cross-border portfolio investment flows following decades' capital account openness and the reform of interest rate liberalization in China, which indicates that Chinese monetary policy is approaching to a market-based framework.

The Study of Interest Rate Liberalization and Bank Performance — An Empirical Analysis Based on Listed Banks in Jiangsu Province

In the modern economic system, interest rates are key economic variables that not only reflect the cost of capital but are also closely related to market-oriented reforms, profoundly impacting the entire economy. This study focuses on the effects of interest rate fluctuations on the performance of listed banks, conducting an in-depth analysis of data from nine listed commercial banks in Jiangsu Province from 2012 to 2020. Utilizing qualitative, quantitative, and comparative analysis methods, this research explores the specific impact of interest rate liberalization on bank performance. It was found that interest rate liberalization has a significant negative impact on the overall performance of commercial banks, especially on city commercial banks. Furthermore, the nominal interest spread positively affects the performance of both types of banks, but its reduction has led to a more passive banking operation. In summary, interest rate liberalization has lowered banks’ return on assets and increased operational risks. Currently, commercial banks in Jiangsu Province are still adapting to the challenges of market-oriented reforms.

The Effects of Interest Rate Liberalization on Small and Medium Enterprises

The financing difficulties faced by small and medium enterprises (SMEs) are major problems hindering the development of the Chinese economy. These challenges not only impede the growth potential of SMEs but also limit innovation and job creation, posing a significant hurdle to overall economic progress in China. This article first presents the financing difficulties of SMEs and examines the reasons causing these difficulties. Then, this article briefly introduces the interest rate liberalization reform in China. After that, this article discusses three effects of interest rate liberalization on SMEs. The first effect is the reduction of the financing cost; the second effect is the increase of accessibility of loans; and the last effect is the transfer of credit resources from large and state companies to SMEs. Then, suggestions on how to tackle the financing difficulties are provided from the perspective of SMEs, financial institutions, and authorities respectively. Lastly, this article concludes that interest rate liberalization reform is conducive in helping enterprises and economic recovery.

Does digital finance change the stability of money demand function? Evidence from China

Understanding the stability of the money demand function is crucial for determining how money impacts inflation and output, and optimizing monetary policy operations. Our study, using China as a case study, examines the potential effects of digital finance on this stability through cointegration technology. We found that digital finance influences the stability of money demand functions differently across monetary aggregates: it leaves M0 unaltered, doesn't influence the unstable M1, but does disrupt the formerly stable M2. We further investigate how two key services of digital finance - payment and asset management - affect the stability of M0, M1, and M2 demand functions. For payment services, our findings suggest the stability impact on the money demand function follows the order of M0 > M1 > M2. In contrast, for asset management services, the impact is ranked inversely. Consistent with recent studies, our data indicates that employing the Divisia index softens the impact of digital finance on the stability of money demand functions. Moreover, it's essential to monitor the pace of reform and understand how the behaviors of unique economic entities impact the money demand function, while concurrently promoting a deeper reform of interest rate liberalization.

The impact of interest rate liberalization on the liquidity risk of commercial banks

This paper selects quarterly data of 10 commercial banks in China (including 5 large state-owned commercial banks and 5 joint-stock commercial banks) for the 10 years from 2011 to 2020 for the study, and constructs a mixed cross-sectional regression model through multiple covariance test and heteroskedasticity test to empirically analyze the relationship between interest rate marketization and liquidity risk of commercial banks in China, and draws the following conclusions: First,interest rate First, the market-oriented reform will greatly increase the liquidity risk level of commercial banks. Second, the interest rate market reform gives heterogeneity to the liquidity risk of large state-owned commercial banks and joint-stock banks. Third, the effect of bank size on commercial banks' liquidity risk is not significant. Fourth, monetary and quasi-monetary growth rates move in the same direction as commercial banks' liquidity risk.

THE EFFECTS OF ENERGY SUPPLY SHOCKS AND INTEREST RATE LIBERALIZATION IN CHINA

THE EFFECTS OF ENERGY SUPPLY SHOCKS AND INTEREST RATE LIBERALIZATION IN CHINA

Does Interest Rate Liberalization Lead to The Narrowing of Commercial Banks’ Interest Margins?

Based on the background of China’s interest rate liberalization, this paper empirically investigates the impact of interest rate marketization on China’s commercial banks’ interest margins using a fixed effects model using panel data of 39 commercial banks in China for the last decade from 2013-2022. The results of the study indicate that interest rate liberalization significantly reduces the interest margins of Chinese commercial banks. In the long run, with the deepening of interest rate liberalization, the interest margins of commercial banks tend to narrow. At the end of the paper, suggestions are made in relation to the current situation of interest rate liberalization in China and the research results.

Interest Rate Liberalization and Firm Leverage in China: Effects and Channels

We examine whether and how interest rate liberalization affects firm leverage in China. We find that interest rate liberalization exerts a negative effect on the leverage of firms. Specifically, firms experience a reduction in total leverage during the liberalization period, and firms’ short-term leverage declines more relative to long-term leverage. Mechanism analysis shows that firms with high information asymmetry enjoy more decline in leverage relative to firms with low information asymmetry, and further, liberalization policy enables the reduction in credit transaction costs, which indicates that the behavior of banks actively collecting corporate information is an important channel that interest rate liberalization impacts firm leverage. Finally, in additional tests, we find that the impact is more salient when firms are non-state-owned, and loss making. Compare to operating liabilities, firms experience more reduction in financial liability.

Interest rate liberalisation to banks' risk resistance: moderator of strategic leadership and mediator of monetary policy transmission

This paper aims to investigate the influence of two missing aspects and to explore whether the liberalisation has had any influence on commercial banks' risk resistance capacity. This article considers 288 data. The analyses include the Sobel test, the ADF stationarity test, and the VAR model co-integration test. Our results show that China's interest rate marketisation reform has a positive effect on reducing bank risk. Commercial bank anti-risk capabilities can improve both China's monetary policy transmission and strategic leadership capabilities. This article showing that appropriate laws and regulations should be strengthened to reduce the risk of bankruptcy that commercial banks may face as a consequence of interest rate liberalisation. This paper contributes to the theory of interest rate liberalisation and anti-risk capability, by conceptualising from strategic leadership and monetary policy transmission theory. It finds that market-oriented rate reform has increased interest rate risk.

Interest rate liberalization and debt risk in China

Interest rate liberalization, which will have a multi-impact on the economy in the process of marketization, especially on the macro-debt market, is a requirement to develop the market economy. It is a current important economic topic that the risk control of the macro-debt market is related to the healthy degree of the economic de-velopment after the debt financing leverage turns to assets investment, and the study around these contents should be a cause for concern. As an important component of deepening financial reforms, the effect of interest rate liberalization on owners’ opera-tions and management behavior of a micro-enterprise is prominent; on the other hand, the continuous climbing debt risk of local government will affect the financial deci-sions and implementation effect of enterprises by spillover effect. We made an empir-ical research on the extent of interest rate liberalization in China integrating relevant modes with the statistical data of PBC and our nation. Research on the reform in the Chinese financial market showed that prompting the reform of interest rate liberaliza-tion can obviously increase enterprises’ financing capabilities which will be restrained by the aggravation of the local government’s debt risk, and the significant enhance-ment of it enhances the impetus to enterprises’ financing capabilities from interest rate liberalization.

The impacts of RMB internationalization on onshore and offshore RMB markets

AbstractUsing the DCC‐GARCH model, this study considers distinctive features of China's foreign exchange market to investigate the impacts of RMB internationalization on exchange rates in onshore and offshore markets in different stages during 2010–2017. The results show that policies concerning RMB internationalization, such as interest rate liberalization, exchange rate liberalization, and capital market internationalization, have different impacts on the central parity rate, onshore exchange rate, and offshore exchange rate. In terms of exchange rate liberalization, as the daily trading band was gradually widened in 2012–2015, the onshore exchange rate followed the offshore exchange rate more closely. The central parity rate functioned as a managed floating role. It stabilized onshore and offshore exchange rate fluctuations, while allowing partial marketization. After the exchange rate reform on August 11, 2015, the central parity rate plays a benchmark role based on a more market‐oriented price formation mechanism. It makes the central parity rate regain pricing power in onshore and offshore markets. Further, it promotes exchange rate liberalization and RMB internationalization. Nevertheless, with the slowdown of China's economic growth and the narrowing of the interest rate differential between China and the US, the RMB is under pressure to depreciate, and its volatility increases significantly.

Analysis of the non-linear relationship between Interest Rate Distortions in China’s Shadow Banking System and short-term Capital Flows

ABSTRACT Using semiparametric generalized additive models, we studied how the market-based interest rates in China’s shadow banking system and interest rate distortion affect the country’s short-term capital flows. We used big data of shadow banking products to calculate the shadow banking interest rate and the interest rate distortion index. We improved the indirect measurement method for capital flows and used the bounds testing cointegration approach to measure China’s monthly short-term capital flows. With the calculated data, we estimated the nonlinear impact of shadow banking interest rate spreads and interest rate distortion on short-term capital flows. Results indicate that a higher shadow banking interest rate spread creates greater short-term capital inflows and the degree of interest rate distortion has a non-linear inverted U-shaped effect on short-term capital flows. Thus, the Chinese government should proceed with interest rate liberalization to eliminate the current “dual-track interest rate system” and strengthen the monitoring of cross-border capital flows so as to reduce the risks of abnormal short-term capital flows.

Derivatives and Personal Finance: Structured Financial Products

In recent years, with the gradual development of interest rate liberalization, our country gradually entered the era of low interest rate. The income of all kinds of financial products can not meet investors' expectations gradually. And structured financial products as a new financial product, relies on its structural model by combining the basic financial instruments and derivative financial instruments, with its characteristics of both fixed income securities relatively safe and financial derivatives to hedge risk, the benefits of asymmetric characteristics, has become popular with investors in our financial markets products. This paper introduces the background and concept of structured financial products, in-depth analysis of the internal structure of structured financial products and product applications, and the future development prospects of this kind of financial products.