China's Low Interest Rate Policy Research

The level of interest rate of a country in a certain period is a comprehensivereflect of production efficiency, development strategy, market competition, socialdevelopment and other factors of the country in the period. The state will adjust thelevel of interest rate according to the strategy of economic development and the needof macroeconomic situation. The United States, Japan and other countries have beenimplement long-term low interest rates policy historically. To stimulate the recoveryof the world economy, the world’s major economies implement the policy of lowinterest rates widespread after the2008United States Financial Crisis. Chinaimplemented the policy of low interest rates last more than30years from1978,when the policies of Reforming and Opening began, to2011. In the more than30years, the average real deposit rate of Chinese financial institutions is about equal tozero.This dissertation provided theory support to the market-oriented rate reform ofmarketization of interest rate in China through the scientific definition of low interestrates and low interest rates policy, and specific analysis on policy of low interestrates of each main economy, and systematic theoretical analysis on the formation oflow rates and its policy, which has important theoretical significance and practicalvalue. As a factor of production, the deposit should be matched with return. Soconsidering inflation, no matter in terms of regulated interest rate or market-orientedinterest rate, the real income of deposit is extremely low or is zero, even is negative,which is the performance of low interest rates, is also the results of implementationof the low interest rates policy. The real yield of money lenders is extremely low,which is the basic theoretical starting point to the judgment of low interest ratespolicy in this dissertation.With the development of the domestic economy of China, the negative effect ofpolicy of low interest rate and credit rationing is increasing. In addition to the furtherintegration into the global economy of Chinese economy, China’s low interest ratespolicy is faced with more difficulties and uncertainties. Therefore, it is an urgentneed to study in-depth, and examine afresh low interest rates policy in China whichhad been implemented for years. At the same time, to reform the low interest rates policy is in need for restraining inflation,and especially is in need for promotingeconomic development mode from to rely on pulling from governmental investmentto move towards to pulling from domestic consumption. Disentangling domestic andinternational effect of the low interest rates policy, giving the feasiblecountermeasures has huge significance to promoting the transformation of the modeof economic development, and to promoting the further deepening of reform andopening up.Since reforming and opening, low interest rates policy has been one of the mostimportant financial policies of China. According to the level of interest rates sincethe reforming and opening, mainly to the level of deposit rates and loan interestrates, applying analysis of low rates theory, it can be judged that the interest ratespolicy of China is typical an low interest rates policy. Low interest rates policy is animportant policy within investment-led economic development mode in more thanthirty years since China’s reform and opening up, and has played a positive role inrapid development of China’s economy more than thirty years. The promoting role ofChina’s low interest rates policy on economic growth mainly embodies instimulating investment growth. The rapid economic growth depends on the rapidinvestment growth in the early stage of China’s economic development. Through theimplementation of the policy of low interest rates, it can be not only directly reduceinvestor’s financing cost, but also reduce the operation cost after the formation of theinvestment, and at last stimulating investment demand increases. At the same time,since the interest rate elasticity of savings in China is very low, low interest ratespolicy will not cause a significant decrease in savings, so will not influence thesource of funds that the investment required. Therefore the low interest rates policyis extremely effective in stimulating investment, and stimulating the rapiddevelopment of economy. At the same time, the low interest rate policy provided acritical condition for China’s modern financial system and construction of China’sfinancing system with commercial banks as its main body.Although low interest rates policy has been promoted economic growth, itinevitably brings some negative effects. Firstly, the low interest rates policy pushesup inflation and asset bubbles, particularly the real estate bubble. At present, theproblem of inflation has become one of the major problems affecting economicdevelopment, with high prices as the representative, and the asset bubble has also become a major economic and social problem. Secondly, the low interest rates policyleads to overinvestment and, low investment efficiency and excess productioncapacity. Under the condition of which the mechanism of interest rate can formingcannot truly reflect the degree of scarcity of funds, some market body can obtainfunds which below the market equilibrium level and can earn excess profits, whicheventually led to a series of problems such as the excess of investment. Low interestrates policy not only makes excessive use of resource, but also stimulates lowefficiency project investment that does not have conditions to enter the market. Themore low interest rates implemented by government deviates from interest rate withthe market equilibrium, the more the possibility may be the greater that the resourceis excessive use, and the more the production efficiency is low. Thirdly, the policy oflow interest rates damages savers’ interest, and reduces the savings income, and isdisadvantageous to the expansion of consumption. When especially the residents’income problem becomes one of the main issues that influences economydevelopment and social stability, the rationality of low savings rate policy under thecontrol of the state should be discussed afresh, and low interest rates policy needsreform and transition.Reforming low interest rates policy is very urgent, but which faced with verycomplex dilemmas. In modern market economy, interest rate has become one of themost important economic variables which have deepest and extensive influence. Anymajor interest rate reform is likely to bring strong vibration to the whole economicsystem. Therefore, to reform China’s policy of low interest rates, the economicenvironment of China must be considered, which is not only related to the success orfailure of the adjustment of interest rate policy, but also related to the long-termeconomic development. First of all, the state-owned enterprises are the mainbeneficiaries of the policy of low interest rates, so low interest rates policy reformshould firstly consider that the state-owned enterprises can or not have autogenouslycapacity after the loss of the low interest rates policy protection, and can or notcomplete the strategic positioning requirements by government. Secondly, financialinstitutions are another major beneficiary of the policy of low interest rates, so lowinterest rates policy reform should consider the development of financial institutionsand great influence to the stability of financial environment. Finally, we shouldhandle the complex relationship between the low interest rates policy reform to the reform of the exchange rate, and to the reform of foreign exchange reserve, and tothe international speculative capital management, and to the pressure of appreciationof the RMB.The marketization of interest rate is the Fundamental method of the reform ofChina’s policy of low interest rates, namely the level and volatility of interest rate isdecided by the supply and demand and competition in market. The government,financial authorities, commercial banks and state-owned enterprises all need fullypreparations for the low interest rates policy reform. In the reform process of lowinterest rates policy, we should gradually raise deposit interest rates, abolish creditrationing as soon as possible, and introduce a negative interest tax when necessary,in order to remiss the existing rate control. The marketization of deposit and loaninterest rate is the key and difficult point of interest rates marketization, also is thekey of reform the policy of low interest rates. We should gradually realize themarketization of interest rate through marketization of interest rate of large depositand debt instruments, and through promoting flow all kinds of financing methods inthe whole society and vigorously developing direct financing. In the process ofinterest rate marketization, all sorts of risks brought by the marketization of interestrate must be strictly controlled.In this dissertation, the main conclusions are as follow: firstly, the low interestrates policy can improve the speed of China’s economic development, but cannotpromote economic stability, high efficiency, and long term development. Secondly,the reform of low interest rates policy is a part of socialism market economy reformwith Chinese characteristics; the goal of reform of low interest rates policy is toestablish a sustainable economic development patterns, robust microcosmiceconomy bodies and a stable and efficient financial system, and its basic train ofthought is the marketization of interest rate. Thirdly, the reform of low interest ratespolicy has no fixed modes; the key to success is to select several criticalbreakthroughs, and to control the reform risks.