The Roadmap of Interest Rate Liberalization in China

This paper examines the roadmap of interest rate liberalization in China, including the current dual-track interest rate system and the future benchmark rate system. It provides a theoretical foundation for China to develop its own benchmark interest rate. A Vector autoregression model (VAR) is estimated to investigate the effectiveness of Chinese market interest rates, Shanghai Interbank Offered Rate (SHIBOR), and repo rates against different factors such as market size, volatility, transmission channels of monetary policy, and term structures of interest rates. The result shows that SHIBOR affects both the market and the economy. As SHIBOR promptly reflects the changes in currency markets, we argue that it has the potential to become China’s benchmark interest rate.