The Impact of Interest Rate Marketization on Chinese Commercial Banks

Abstract

The research study examine the impact of interest rate marketization in China using qualitative (Interview) and quantitative research methods. The results indicated that interest rate marketization have positively impacted commercial banks as evidenced by increased operations and functions in China and in foreign countries. The findings would be attributed to the financial reforms that have been at the core of China’s economic growth and development since 1995. With an increased competitiveness of commercial banks, Chinese have taken loans at affordable rates and deposited their savings, which equally earns increased rates. Reforms executed in China could be applied in other regions of the world.

Keywords

Interest rate marketization; commercial banks; China; Financial sector, globalization

An overview of Market Oriented Interest Rate

Since the introduction of financial reforms that called for interest rate marketization, all categories of commercial banks in China, including rural, small and large financial institutions have exercised autonomy in setting interest rates for loan and deposit products (Morrison, 2019). From the mid-1970s to present, commercial banks have recorded increased growth because of favorable business climate brought about by interest rate liberalization (Chi, and Fu, 2016). In addition to providing domestic financial services, commercial banks have expanded to international markets, offering loans to countries and firms around the world (Watkins, Lai, and Bradsher, 2018). New economic reforms featured eased monetary policies that increased bank lending as well as efforts to promote domestic consumption. With banking sector being driven by market fundamental, and China opening up its doors to major markets, including the U.S, China’s economy have recorded on average double digit GDP’s growth over the past three decades (Li, and Liu, 2019). With an increased growth of bank lending, they grew in size, which have allowed banks to provide financial services in the economy sector to fund both short-term and long-term development projects (Watkins, Lai, and Bradsher, 2018). Developments contributed to employment creations, improved standards of living and eradication of extreme poverty, which explains rapid economic growth and financial stability (Herr, and Priewe, 1999). Interest rate marketization reforms implemented in China are based on economic principles of supply and demand. With the rapid economic growth, China economic reforms have emerged as an alternative route towards economic prosperity. Economists globally have developed interest in studying China’s economic roadmap, and transferring the knowledge to other developing and underdeveloped countries across the globe.

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Chapter 1

Introduction

People’s Bank of China, received instruction from the ruling party, The Community Party of China (CPC) to plan for the implementation of interest rate marketization reforms in 1995 (Zhao, Wang, and Deng, 2019). These reforms were aimed at allowing commercial banks to be more autonomous (Xiao, and Zhou, 2015). Essentially, the reforms sought to permit the banks to apply interest rates on their products, which included loans and deposits depending with the rate of supply and demand (Chi, and Fu, 2016). This was a new beginning for commercial banks as government interference was significantly reduced. Interest rate marketization has been recognized as an important financial and or economic reform toward improving the degree of financial marketization in China (Li, and Liu, 2019). Interest rate marketization has been fundamental in China’s economic growth and development based on two crucial factors. Firstly, large-scale capital investments that were funded through domestic savings from the various Chinese banks contributed significantly to the rapid economic progress and growth witnessed in China (Bayoumi, Tong, and Wei, 2012). Secondly, increased Foreign Direct Investment (FDI) leading to rapid productivity growth could be traced to reforms on interest rate marketization (Morrison, 2019).

Over the past four decades following the introduction of interest rate marketization, there are specific changes noticeable in operations undertaken by commercial banks. The commercial banks initiated a deposit guarantee scheme for their customers (Xiao, and Zhou, 2015). Through this reform, customers have taken development loans from their respective commercial banks to invest in a rapidly growing economy. Comparatively, the reforms saw the removal of implicit guarantee that was previous placed on the commercial banks (Morrison, 2019). Correspondingly, deposit r