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Research on Interest Rate Policies in China’s Economic Development

Author: LiuYang
Tutor: XuChuanZuo
School: Jilin University
Course: Law and Economics
Keywords: Interest rate Economic cycle Consumption Investment Monetary policy Inflation Deflation
CLC: F822.0
Type: Master's thesis
Year: 2011
Downloads: 384
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Abstract

The interest rate policy is an important part of a country's monetary policy. Interest rate as an important economic lever, investment businesses and residents, the residents have a significant impact on the consumption and export. The People's Bank of China since the reform and opening up to strengthen the use of interest rate instruments, interest rate adjustments every year frequent, more flexible way of interest rate regulation, the regulation and control mechanisms are maturing, and played an important role in maintaining price stability, promoting China's economic growth. The paper is structured as follows: the analysis of the interest rate regime in China is divided into two main areas: First, the interest rate policy in the 61 years since the founding of the summary of the system, depending on the basic interest rates, the 61-year interest rate regime evolution divided into three interest rate policy in 1979 to phase analysis - from 1949 to 1978 in 1995, the high interest rate policy stage and the stage of the low interest rate policy in 1996-2010; relationship between China's interest rate policy and economic growth between 1990-2009 empirical analysis to determine whether the low interest rate policy of the central bank in this period does play a role in promoting China's economic growth. Interest rate policy is to establish some theoretical basis. Interest rate theory has always been important research by economists, because it not only plays a role in guiding interest rate policy, while itself implies a strong policy implications. From the start of the 17th century, economists began systematic research on the question of interest. Centuries interest in the research process, there have been all kinds of theories, these different interest theory can be roughly divided into two schools: the actual interest theory and monetary theory of interest. Effective interest theory is a long-term interest theory focused on the analysis of the actual long-term economic factors, including the said capital productivity, capital use, abstinence, jet lag, intolerance - the chance to say. Compared to the actual interest theory, monetary theory of interest is a short-term interest theory mainly includes the classical equalization said, provides loans to funds, liquidity preference says, IS - LM model. The interest rate is an important economic lever, have a very important role in regulating the macroeconomic performance and microeconomic run. First, interest rates and commodity prices; Second, interest rates and savings; Third, interest rates and investment. Keynesians view monetary policy through interest rate channels have an impact on economic activity, has been subject to the attention of Western economists, is considered one of the most important transmission channels. Keynes argued that changes in the money supply to break the equilibrium of the asset markets, the role of the market mechanism, the corresponding changes in the interest rate of the asset market equilibrium resume; same time, changes in interest rates led to investment through the cost of capital effect change, and then through the multiplier The effect of total social spending to much greater change, and ultimately affect the level of output and prices. Early days, due to war and other factors, there is an extremely serious inflation. Therefore, at this stage of the exchange rate policy as the main target of anti-inflation, the implementation of the high interest rate policy. Beginning in March 1950, to promote the development of trade and industry, the People's Bank has five times lower level of interest rates. Since 1953, with the start of the first five-year plan of the national economy, the People's Bank has six times the lower interest rates. In 1971, the 1-year deposit rate to 3.24%, the lowest since 1949. Stage of the high interest rate policy in 1979-1995, the 16 years from 1979 to 1995, the benchmark deposit and lending interest rates of up to 11.34% and 11.52%, respectively, this stage, the average deposit and lending rates reached 7.23% and 9.52%, respectively, compared with high level. After the Third Plenum of the Tenth China began to focus on economic construction. To raise funds for construction and to stabilize the price level, the People's Bank has eight times to raise deposit interest rates; China started reform and opening up in 1978, the government's focus shifted to economic construction, the rapid growth of investment in the whole society. Over the same period, the government implemented expansionary monetary policy, the growth rate of the money supply and bank credit growth increased from 9.7% in 1978 and 10.2% to 25.5% in 1980 and 18.3%. But from 1984, government infrastructure stall shop too much currency out of control, the rapid expansion of the scale of investment in fixed assets of the community, the investment growth rate from 1983 to 1985 reached 16.2%, 28.2% and 38.8%, respectively. 1990-1992, since the reform and opening up, China's interest rate policy, the first rate cut cycle. Beginning in April 1990, the People's Bank has three times lower deposit and lending rates in response to economic weakness; one-year deposit rate from 11.34% in 1989 to 7.56% in 1991 from 1989, the one-year lending rate of 11.34% to 8.64% in 1991. Beginning in 1992, Deng Xiaoping's \history. Beginning in 1998, the Chinese economy has entered a period of low interest rates of up to 13 years, the benchmark deposit rate for the period remained at a low level of between 2% to 4%, the average deposit and lending rates of 3.2% and 6.5%. Due to the impact of the East Asian financial crisis in 1997, China's economy in the 1998-2002 period into a state of deflation and sluggish growth; five years, three years, the inflation rate was negative, the average inflation rate was -0.37% . Since 2003, the scale of investment in fixed assets in the country once again begin to swell, the rate of investment growth rate surged from 6.9% in 2002 to 27.7% and 26.8% in 2003 and 2004. To solve the overheating of the economy, rising prices and asset market bubbles and other serious economic problems began in October 2004, the People's Bank of consecutive 10 times the deposit and lending rates, a one-year deposit and lending rates, respectively, from 1.98% in early 2004, and 5.31% to 2007, the end of 4.14% and 7.47%. Due to the impact of the international financial crisis in 2008, from the end of 2008, China's economic growth started to slow down, the GDP growth rate from 14.2% in 2007 to 9.6% and 9.1% in 2008 and 2009. To ensure economic growth, the People's Bank in accordance with the principle of distinction, to maintain pressure \% and 5.13%. The same time, the central bank also reduced the refinancing rate, the rediscount rate and deposit reserve ratio. Interest rate policy as an important part of the monetary policy, the main policy objectives are two: First, to promote economic growth, and the second is to maintain price stability. The first one goal can be achieved, depending on the linkage between a country's economic system exists to determine the interest rate and output, that is, whether the interest rate effect on output. 19 years from 1990 to 2008, China's total investment to maintain a high growth rate, the average investment growth rate of 18%. Carefully observe the trend of the interest rate curve and the total investment growth rate curve in Figure 6 and the relationship between them, can be found, with the more obvious relationship between the effective interest rate (deposits and loans) and the total investment growth: When the effective interest rate on the rise Over the same period, the total investment period, the decline in growth; actual interest rate in a period of decline, the total investment growth rate for the same period increased. 20 years from 1990 to 2009, China's economy has achieved great success, with an average GDP growth rate of 9.92%. Careful observation of the GDP growth rate curve and the trend of the interest rate curve and the relationship between them, can be found, the effective interest rate (deposits and loans) and has a more obvious relationship between GDP growth: when the actual interest rates are on the rise over the same period The decline in GDP growth; effective interest rate in a period of decline, the increase in GDP growth over the same period. The relationship between the nominal interest rate (either deposit or lending rate) and GDP growth rate was not significant. Empirical analysis shows that, with the more obvious role of China's interest rate policy on economic growth. Keynesian interest rate policy which means that to achieve its policy objectives - to promote economic growth, low interest rates, stable at high interest rates to regulate the economy. Transduction pathways output effects from interest rate point of view, the main interest rate through the channels of investment and consumption affect China's GDP growth.

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