Should China Accelerate The Reform Of Interest Rate Marketization?

Since 1996,the process of interest rate marketization in China has been carried out orderly for 18 years.The principle of the reform is that:local currency after foreign currency, deposit after loan, short-term deposit after long-term deposit. The People’s Bank of China eased the floating range of lending rate of the financial institutions in 2004.Then the central bank made the full liberalization of the lending rate of the financial institutions in July,2013.The lending rate would be determined by the financial institutions on commercial principle, which means the interest rate marketization in China is accelerating and the progress is entering the final crucial stage.President of People’s Bank of China,Zhou Xiaochuan,mentioned that the final step of interest rate marketization in China is the liberalization of the deposit interest rate,which will be achieved in the coming two years.According to the different financial development and practice all over the world,the interest rate marketization is the most complex and challenging part of the financial development and reform.Both in developed and emerging market countries, the process of interest rate marketization had caused some shocks and turmoil to the national economy.The interest rate marketization have both successful experience and failures.The failure result from the unbalance between the development of real economy and the virtual economy and the mismatching of financial system reforms.Larger fluctuations of interest rates make banks,enterprises and the national economy facing enormous challenges.Whether the deposit interest rate should be controlled under current conditions in China? If not,how to release it? What results will the resealed measures bring to the economy in China? Whether the fluctuations that resulted from the liberalization of the deposit interest rate are within the tolerance range of the real economy? These questions are worth researching.This paper built up a detailed analysis model to simulate the impacts of interest rate marketization in China,and make a judge on whether it is a proper time to make interest rates fully marketization in multi-angle currently. The DSGE model has many advantages, including the perfect combination of macro and micro, the consistency of the model theory and the actual economic performance,the organic integration of the long-term and the short-term analysis.This paper built up a New Keynesian DSGE model,which contains six departments.they are families,entrepreneurs,intermediate goods manufacturers, end-product manufacturers, financial agencies and central banks.And through the introduction of interest rate control policies and other equations to describe the unique Chinese monetary policies.The special character of this paper is that this paper uses a new approach that introduce capital utilization rate furtherly into depreciation in the DSGE model,which will reflect the real impact of capital utilization rate and depreciation more accurately and comprehensively.As a result,this paper can analyze the response of our economy to a variety of exogenous shocks comprehensively under different degree of market interest rates in the DSGE framework.The conclusion is that the impact of fully interest rate marketization on macroeconomic is not significant under the current circumstance.Most economic variables are not sensitive to it.All in all, now is the time to accelerate the speed of interest rate marketization reforming and realize the fully interest rate marketization in the coming few years.Corresponding to the conclusion,this paper come up with the following four suggestions. Firstly, further improve the relevant supporting infrastructure of interest rate marketization reforming.Secondly,encourage commercial banks to develop financial innovation.Thirdly,promote the development of capital market, alleviating the impact of interest rate fluctuation on the economy.Fourthly,improve the formation mechanism of exchange rate and increase the flexibility of exchange rate properly and gradually.