ABSTRACT
Changes in the structure of interest rates affect the decisions of profit-oriented firms directly as well as the profitability of banking operations. Institutional reforms are crucial in allowing the banking system to assume a meaningful independent role in the economic system. A bank branch also is allowed to reallocate loans among the following categories, as long as the overall target is met: loans to state industrial enterprises, to collective industrial enterprises, and to commercial enterprises, both state-owned and collective. Direct or indirect quantitative restrictions on bank credit of course will prevent the multiplier from operating, but by their very nature they defeat the purpose of the decentralization measures. Low interest rates, combined with the fact that for industrial enterprises most working capital is financed by state budget appropriations rather than bank loans, contribute to a somewhat different problem noted by Chinese scholars.
