Reflections on the Reform of China's Market-based Interest Rate Regulation System
The interest rate corridor and interest rate floor systems are two optional models within market-based interest rate regulation frameworks,with the choice between them being related to the adequacy of reserves within the banking system.This paper delves into the reform strategies for China's market-based interest rate regulation system,focusing on how to further enhance the effectiveness of the current interest rate corridor system.The starting point of this study is the relative adequacy of reserves in China's banking system,a characteristic that determines the scope for selecting interest rate regulation models.This paper begins with a comprehensive analysis of the current reserve situation in China's bank-ing system and introduces a metric for the relative adequacy of reserves.Specifically,it examines the comparison be-tween reserve levels and reserve demand,as well as the scale of tradeable assets between the two main parties in the cen-tral bank's open market operations(i.e.,the central bank and other banking institutions),analyzing the dynamic trends of the relative adequacy of reserves in China's banking system.This analysis considers not only the overall adequacy of re-serves but also the adequacy of excess reserves.Given that these metrics measure the ratio of reserve supply to demand,they are comparable to international stan-dards.Comparative analysis shows that China's reserve adequacy level is neither as scarce as that of the United States be-fore the 2008 global financial crisis nor has it reached the massive levels seen after the crisis.Instead,it occupies a unique medium scale,providing more room for the selection of market-based interest rate regulation tools and systems in China while also presenting specific requirements for the reform of China's market-based interest rate regulation framework.Against this backdrop,this paper suggests that China's market-based interest rate regulation system could consider introducing an interest rate floor element to form a more flexible and adaptable hybrid model.The core of this suggestion lies in utilizing the interest rate on excess reserves(IOER)combined with open market operations(OMO)to stabilize short-term market interest rates,particularly the market benchmark rate represented by the 7-day repo rate(DR007)of deposit-taking institutions.Through detailed dynamic analysis,this paper points out that with the dynamic adjustment of reserves by the central bank,China's market-based interest rate regulation exhibits more flexibility,and both open market operations and reserve interest rates can be used as monetary policy tool options to better guide policy rates.Furthermore,under appropriate conditions,the central bank could consider enhancing the effectiveness of market-based interest rate regulation by introducing overnight repurchase agreements(ONRP)involving non-bank financial insti-tutions.This approach would not only further solidify the lower bound of short-term market interest rates but also ensure that market interest rates fluctuate within the central bank's policy intentions.If the scale of reserves increases further in the future,the central bank will possess the flexibility to transition to an interest rate floor system dominated by IOER,thereby enhancing the linkage between short-term and long-term interest rates and optimizing the monetary policy trans-mission mechanism.In summary,the study demonstrates that as China's economic and financial environment evolves,the dynamic ad-justment of the interest rate regulation system is not only necessary but also technically feasible.The People's Bank of China's previous work has laid a solid foundation for these reforms.By introducing reserve interest rates and other tools on the basis of open market operations,the central bank can effectively guide the trend of market interest rates in the short to medium term,achieving consistency between short-term and long-term interest rate regulation,thereby providing stron-ger support for China's monetary policy framework.In the future,if the scale of reserves increases further,a hybrid model combining the interest rate corridor with a floor system could provide a more flexible and effective solution for China's market-based interest rate regulation system.
Central BankMonetary PolicyInterest Rate on ReserveInterest Rate CorridorInterest Rate Floor
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