Paper Title
Market Effects of Interest Rate Liberalization in China

Abstract
Standard economic theory prescribes that a freely determined interest rate is the best way to allocate scarce financial capital, with savings channelled to the borrowers best able to afford the prevailing price of loans. Less profitable projects will be thus discouraged from being undertaken, and allocative efficiency in the economy is improved. In the long process of reforming the Chinese economy, liberalization of funding markets and interest rates had begun in 1996, when money and bond market rates were freed from regulation while restrictions on the interest rate of bank lending had officially been removed earlier in July 2013. Despite that, the People’s Bank of China (PBOC) has never made explicit its main intermediate target for monetary policy, and the usage of tools to achieve any such target(s) remain pluralistic. With other quantity controls still in place today, interest rates in the Chinese financial markets can only be said to be on the road to deregulation and is far from fully liberalized. This paper aims to conduct testing for changes in this market, there are several facets to consider. Since bank lending is the most important form of finance for economic activity, the existence of a lending rate floor, if binding, can distort the interest rate as a price signal for the allocation of capital. With banks at the same time being participants in the money and bond markets, both in the short end with repurchase agreements (repos) and the long end with treasury bonds, all these other interest rates can also be affected. The absence of a lending rate floor may have enhanced the efficiency of the bank lending market. This improvement may be reflected in reduced deviation of lending rates from its equilibrium.