Interest Rate Compression, Overcapacity And Credit Regulation

The deposit and loan rates in China have been under restrict compression for a long time, with both rates stay at low levels. Interest rate compression distorts factor price, makes the cost of capital below the equilibrium level, and leads some industries to excessive investment, redundant construction, and overcapacity.This paper established a real-financial computable general equilibrium (FCGE) model based on input-output table and cash flow statement in 2007. As bank credit plays a decisive role in directing investment flows in China, this paper focuses more on the bank credit over other financial tools. This paper managed to obtain the loan rate, which performs as an endogenous variable in the FCGE model, by solving the credit market equilibrium. Two credit regulation policies are also considered in this model to find out to what extent they can relieve overcapacity.Model results show that:(1) Interest rate compression will not have significant impacts on total output or total capital stock, but the impacts on industrial ones are obvious. (2) 11 industries, most of which are manufacturing industries, will face the problem of overcapacity, and most of them need external policy intervention. (3) Loan rate discrimination and quantitive limit, two kinds of credit regulation policies, can relieve overcapacity to some extent. Weak rate discrimination works best in all policies and policy combinations. Quantitive limit needs continuous adjustment. (4) All credit regulation policies are not once and for all, even weak rate discrimination policy requires adjustment for certain industries.