Impact Of Financial Disintermediation On Chinese Monetary Policy Interest Rate And Credit Transmission Mechanism

In the early 1960s, developed countries began to experience a wave of ’financial disintermediation". Financial disintermediation mainly refers to the phenomenon that money bypasses the banking system and is traded directly between capital demanders and providers. In China, financial disintermediation has emerged gradually from the 1990s, which presents an obvious trend nowadays. In particular, financial disintermediation in our country can be divided into three types:banks’ asset side disintermediation, liabilities disintermediation and technology disintermediation.Throughout the financial disintermediation in foreign countries, it can be found that financial disintermediation is inevitable outcome when financial markets develop to a certain stage. The change of economic system and the development of financial market also create the process of financial disintermediation. At the beginning of the reform and opening up, China’s financial market is almost a blank and financial system is very poor. The path dependence of institution change makes China form a financial system which is leaded by banks. Indirect financing is dominant in social financing. However, with the scale enlargement of Chinese economy and the complexity of economic structure, various economic subjects need more and more diversified financial needs, the development of financial market became an endogenous need. Single-structure financial system is not only unable to optimize the allocation of financial resources, but also increases the risk of financial system by gathering various risks in banking system. Accordingly, government has taken a series of policies to encourage the development of financial market. In recent years, thanks to the effect of various positive factors, China’s financial market meets a great opportunity and its scale is expanding unceasingly. The controlling of credit and interest rate, in combination with foreign exchange policies and the influence of inflation, jointly induced a large part of cash flow began to bypass the traditional port of commercial banks. Direct financing has become a preferred financing channel for borrowers owing to its intrinsic advantages. In recent years, the rapid development of the "shadow banking" and internet banking has also intensified the process of financial disintermediation to a certain extent. Although financial disintermediation will be a long and tortuous process due to the present bank-dominated financial system, it is inevitable in the foreseeable future.As an economic phenomenon of the financial system, financial disintermediation has two profound impacts on China’s economic and financial system. On the one hand, the flows of funds will largely bypass the commercial banks of the financial intermediaries under the condition of financial disintermediation. This financial disintermediation between the banks’assets and liabilities parties will bring a huge challenge to the traditional profit model of commercial banks. On the other hand, the continuous deepening of financial disintermediation will necessarily causes impact on the choice of monetary policy’s objectives, tools and transmission mechanism. Among them, monetary authorities are suggested pay more attention to the impact of financial disintermediation to transmission mechanism due to its complexity and importance. Most existing literatures focus on the challenges brought by financial disintermediation and commercial banks’countermeasures. It is highly desirable and of great importance to study the impact of financial disintermediation on monetary policy transmission mechanism.Monetary policy transmission channels can be divided into four types:credit channel, interest rate channel, asset price channel and exchange rate channel. Credit transmission channel plays a leading role in China, while the interest rate channel is the basis of the other two channels. Therefore, this paper focuses on the impact of financial disintermediation on the credit channel and interest rate channel. According to the newest financial data of China, an index was built to measure the degree of financial disintermediation and to analyze the impact of financial disintermediation on the interest rate channel and credit channel of monetary policy transmission mechanism both theoretically and empirically by combining the theory of monetary policy. The results showed that financial disintermediation promoted the effect of interest rate channel and weakened the credit channel in Chinese monetary policy transmission. The main innovation lies in the measurement and analysis of financial disintermediation in our country by using the latest financial data and the use of VAR model which is widely used in analyzing the monetary policy transmission to verify the conclusion of theoretical analysis. Based on the aforementioned results, this paper finally provided some suggestions on how to perfect monetary policy transmission mechanism under the background of the financial disintermediation.