Interest Rate Pass-Through in China: An Analysis of Chinese Commercial Banks

ABSTRACT

This study investigates the interest rate transmission in China. We analyze the extent to which the benchmark and wholesale interest rates are transmitted to the retail interest rates and focus particularly on the change in the interest rate pass-through after the interest rate liberalization. Using data of 16 listed banks from 2007Q1 to 2017Q3, we find that the pass-through is not yet complete. Even though interest rates have been liberalized on the policy level, the sensitivity of the retail interest rates to the wholesale rates has not increased enough as expected and may be explained by the market power of Chinese commercial banks.

KEY WORDS:

• interest rate liberalization
• interest rate pass-through
• market power

Notes

^1. The ratio of the total bank assets accounted for by foreign banks decreased from 2.11% in 2006 to 1.26% in 2016. By the end of August 2017, there were just 13 private capital banks in China, the assets of which accounted for less than 1% of the total in the banking industry.

^2. Brazil, Russia, India and China.

^3. A measure of market power in the banking market. Higher values of the Lerner index indicate less bank competition. Lerner Index estimations follow the methodology described in Demirgüçkunt and Martinez Peria (2010). Calculated from underlying bank-by-bank data from Bankscope. Data sources: http://data.worldbank.org.

^4. The data are obtained from the Orbis Bank Focus and iFinD.

^5. In 2016, the total assets of commercial banks in our sample were 134.33 trillion yuan. According to the CBRC, the total assets of all commercial banks in China that year were 175.94 trillion yuan.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71373071]; Specialized Research Fund for the Doctoral Program of Higher Education of Chinese Ministry of Education [2011061110023];