ABSTRACT
China’s economic reform is a gradual transition from the planned economy to a socialist market economy. The essence of market-based interest rate reform is to transfer the capital pricing power from the government to the market, and its core lies in deregulating interest rates to expand market players’ pricing power and optimizing the allocation of resources. The key of the dual-track system lies in the regulation on deposit rates, which is essential to the understanding of the transmission between regulated rates and market-oriented rates. Analysis of the dual-track system shows that the ceiling on deposit rates had suppressed interest rates in the money market and had generated excessive liquidity. The market benchmark interest rate system plays a fundamental role in a country’s interest rates system as a reference for the pricing of other rates. A yield curve covering interest rates of various maturities is needed for the purpose of asset pricing and valuation of derivatives.
