Does interest rate liberalisation affect the constancy of mean interest rates in China?

Pages:555-568
SUMMARY

Purpose This paper aims to examine the impact of interest rate liberalisation on the constancy of mean interest rates 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... (see full summary)

 
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Does interest rate liberalisation
aect the constancy of mean
interest rates in China?
Hui Hong
Center for Central China Economic and Social Development Research and
School of Economics and Management, Nanchang University, Nanchang, China
Zhicun Bian
Department of Finance, Nanjing University of Finance and Economics,
Nanjing, China
Naiwei Chen
Department of Banking and Finance, National Chiayi University,
Chiayi, Taiwan, and
Chiwei Su
Department of Economics, Qingdao University, Qingdao, China
Abstract
Purpose This paper aims to examine the impact of interestrate liberalisation on the constancy of mean
interestrates in China to test the effect of nancial reforms and provide strategies for future practices.
Design/methodology/approach Bai and Perrons (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 denedby 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 signicant 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, inationaryexpectation and liquidity crunch in China.
Originality/value To the best of the authors knowledge,this paper provides unprecedented evidenceon
signicantchanges in interest rates attributable to the liberalisationwithin the Chinese context.
Keywords China, Structural breaks, Interest rate liberlisation
Paper type Research paper
1. Introduction
Interest rate liberalisation has been the rallying call of reformers for decades in many less
developed countries (LDCs) which possessed repressednancial 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
Constancy of
mean interest
rates
555
Received13 October 2019
Revised29 February 2020
Accepted24 March 2020
Journalof Financial Regulation
andCompliance
Vol.28 No. 4, 2020
pp. 555-568
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-10-2019-0129
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