What China’s interest-rate muddle says about its financial system
IN 1979, WHEN Paul Volcker started jacking up interest rates to quell inflation in America, China launched a radical experiment of its own: it created commercial banks. Deng Xiaoping was trying to steer the country away from central planning. Four decades on, Mr Volcker’s job long done, China’s transition is still unfolding. For evidence of this, look at its interest-rate muddle amid the coronavirus-induced slowdown. Ask a Chinese economist what the benchmark rate is today—a simple question in most countries—and brace yourself for an avalanche of acronyms and numbers.
There are, to name the main contenders, the one-year deposit rate (now 1.5%), the seven-day reverse-repurchase rate (known as the DR007, 2.2%), the medium-term lending facility (MLF, 3.15%) and the one-year loan prime rate (LPR, 4.05%). Each, depending on one’s focus, has a claim to benchmark status. Sorting through all these rates is not merely an exercise in banking esoterica. It is a window into how China manages its financial system.
Start with the basics. China’s central bank is highly interventionist, by design. For years it set loan quotas for banks, told them what sectors to support and dictated the rates at which they took deposits or extended loans. To varying degrees, it still wields these powers. But with the economy ever bigger, Chinese...