Does interest rate liberalisation
aﬀect the constancy of mean
interest rates in China?
Center for Central China Economic and Social Development Research and
School of Economics and Management, Nanchang University, Nanchang, China
Department of Finance, Nanjing University of Finance and Economics,
Department of Banking and Finance, National Chiayi University,
Chiayi, Taiwan, and
Department of Economics, Qingdao University, Qingdao, China
Purpose –This paper aims to examine the impact of interestrate liberalisation on the constancy of mean
interestrates in China to test the effect of ﬁnancial reforms and provide strategies for future practices.
Design/methodology/approach –Bai and Perron’s (1998, 2003) methodology is used to test for
structural breaks in the mean of different interest rates using Chinese data, and break dates are measured
against the exact dates of theinterest rate liberalisation. The performance of mean interest rates across the
regimes deﬁnedby liberalisation dates is also investigated.
Findings –The main results show that interest ratesg enerallyincrease (decrease) after deregulations on lending
(deposit) rates, but these changes are not signiﬁcant to induce a negative impact on the domestic economy. Instead,
the infrequent but important shifts (structural breaks) in mean interest rates are caused by factors other than
liberalisation suchas economic shocks, inﬂationaryexpectation and liquidity crunch in China.
Originality/value –To the best of the author’s knowledge,this paper provides unprecedented evidenceon
signiﬁcantchanges in interest rates attributable to the liberalisationwithin the Chinese context.
Keywords China, Structural breaks, Interest rate liberlisation
Paper type Research paper
Interest rate liberalisation has been the rallying call of reformers for decades in many less
developed countries (LDCs) which possessed “repressed”ﬁnancial systems previously. The
experience to date shows that such liberalisation might induce undesirable consequences
including sharp increases in mean interest rates (Alawode and Ikhide, 1997;Demetriades and
Luintel, 2001;Comert et al., 2010). The potential reasons, as argued by Stiglitz (2000),arethe
ineffective functioning of market mechanisms and regulatory systems in those LDCs. One
exception could be China, which however is much less studied compared to its counterparts
possibly because its liberalisation was initiated late also with a slow pace such that it did not
Received13 October 2019
Revised29 February 2020
Accepted24 March 2020
Journalof Financial Regulation
Vol.28 No. 4, 2020
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