Interest rates in China are not yet liberalised. Why is it so hard for the government to let go?
Why is it so hard for the government to let go? The explanation can be found in two striking facts about Chinese interest rates. First, they are much lower than one would expect for an economy growing so quickly, coronavirus notwithstanding. The real one-year deposit rate is negative. This is not new. China has long been an exemplar of financial repression, limiting savers’ returns in order to make cheap funds available to finance sky-high investment.
In the Chinese context it has a point. Where banks go, so goes the economy. Banks’ assets are worth 175% of, more than in any other country, according to a core measure used by the World Bank . Many analysts think that China’s banks can expand their loans by about 10% a year while making big enough returns to preserve their capital buffers. In a normal year these new loans would be expected to generate economic growth of about 6%, with a mild rise in total indebtedness.
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