ABSTRACT
The People’s Bank of China’s Monetary Policy Committee should play an important role in policy formulation and adjustment. The decision identifies the objective of China’s interest rate reform as steadily pushing forward interest rate liberalization and building a market-based interest rate formation mechanism where the central bank uses monetary policy instruments to guide the interest rates. The essence of the interest rate reform is to let the market rather than monetary authorities determine the interest rates. The dual-track system has evolved in a way that market-oriented interest rates kept expanding and controlled interest rates gradually shrank. Interest rate reform aims to reduce financial repression. Under interest control, the interest rate remains at a low level, which has led to low deposit levels and strong investment incentives. Domestically, the high savings rate and high investment rate can be attributed to institutional, economic, and cultural factors.
