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International Monetary Fund. Asia and Pacific Dept
This 2015 Article IV Consultation highlights that China is transitioning to a new normal, with slower-yet-safer, more sustainable growth. Growth in 2014 fell to 7.4 percent and, in 2015, is forecast to slow further to 6.8 percent on the back of slower investment, especially in real estate. The labor market has remained resilient despite slower growth, as the economy pivots toward the more labor-intensive service sector. Considerable progress has been made in external rebalancing. The current account surplus fell to 2.1 percent in 2014 from the peak of about 10 percent in 2007, and the renminbi has appreciated by about 10 percent since 2014 in real effective terms. Further progress has also been made on domestic rebalancing.
International Monetary Fund. Asia and Pacific Dept

the margin above the benchmark deposit rate remained unchanged (1½ times), the maximum deposit rate fell by 37.5 basis points (to 3 percent). The authorities explained that the nominal rate cut maintained an appropriate level of real interest rates in light of lower inflation. They also noted that credit growth had remained stable, with TSF growth at 12.2 percent (y/y) and M2 growth at 11.8 percent in June. Staff considers, and the authorities agreeed, that monetary and credit developments now appear to be on track toward achieving GDP growth of around 7 percent for

International Monetary Fund

.9 percent, compared to 17 and 11 percent, respectively, at end-2007. The benchmark deposit rate was lowered from 13 percent to 12 percent in January 2009. The external current account shifted to a deficit of 7 percent of GDP in 2007, compared with an average surplus of about 2.4 percent during 2002-06. This shift reflected mainly FDI-financed imports for a liquefied natural gas (LNG) plant. The external accounts benefited from record oil prices during the first part of the 2008, but pressures appear to be emerging in the wake of declining oil prices. The current account

Hu Xiaolian

with an overly rapid expansion of investment and credit, the central bank has taken a series of measures over the past year to tighten credit conditions by issuing central bank bills and raising both the reserve requirement ratio and the benchmark lending and deposit rates. Since 2006, it has raised the reserve requirement ratio on nine occasions, the benchmark lending rate on five occasions, and the benchmark deposit rate on four occasions. Frequent fine-tuning of monetary policy has curbed the overex-pansion of credit growth and avoided the undue contraction impact

International Monetary Fund. Asia and Pacific Dept

-regulatory mechanism for deposit pricing. 2 This system maintained an effective ceiling on deposit rates linked to benchmark deposit rates, even though it allowed that ceiling to rise for smaller banks and introduced further flexibility for certain wholesale and structured deposit types. Bank disclosures show deposit costs have drifted slightly higher during this period, largely owing to a shift into time deposits and other instruments that can offer higher yields but have remained relatively close to the benchmark deposit rates (figure). Transmission from short-term policy rates

International Monetary Fund

intervene when necessary. In this respect, they are open to increasing the benchmark deposit rate. However, they see no immediate need for such an action, given that they deem the recent pick-up in inflation mainly supply driven. Moreover, they are concerned over the effect of higher interest rates on investment and growth. 11- With regard to intervention in foreign exchange markets, the authorities remain of the view that such interventions should be limited to smoothing short-term fluctuations, especially that they concur with staff that a flexible exchange rate that

Mr. Nathan Porter and Ms. TengTeng Xu

_REPO(-4) 0.001 0.017 0.035 0.972 R_REPO(-5) -0.007 0.005 -1.605 0.109 R_REPO(-6) -0.010 0.005 -1.876 0.061 R_REPO(-7) 0.001 0.010 0.144 0.885 R_REPO(-8) -0.007 0.006 -1.154 0.249 R_REPO(-9) -0.007 0.005 -1.420 0.156 R_REPO(-10) 0.006 0.004 1.578 0.115 IPO 0.0004 0.001 0.750 0.453 OMO 0.0000 0.000 0.961 0.337 RR 0.0002 0.000 1.287 0.198 Benchmark Deposit Rate -0.4342 0.0962 -4.5161 0.0000 Benchmark Deposit Rate(-1) 1

Mr. Nathan Porter and Ms. TengTeng Xu
Interest rates in China comprise a mix of both market determined interest rates (interbank rates and bond yields), and regulated interest rates (lending and deposit rates), reflecting China's gradual process of interest rate liberalization. We argue, using a theoretical model and empirical analysis, that the regulation of key retail interest rates diminishes the ability of the market determined rates to act as independent price signals, or as benchmarks for use in asset pricing and monetary policy. Further interest rate liberalization should, therefore, strengthen the information conveyed by movements in interest rates, allowing for the better pricing of risk and capital.
International Monetary Fund. Asia and Pacific Dept

inflation, among other factors. The clearer the policy framework, the easier it will be for the market to establish a yield curve. Reforms to further improve interest rate pass-through , including continued progress on LPR reform and phasing out the benchmark deposit rate (see SIP 1). Steps to increase the financial robustness of the banking system to fluctuations in short-term interest rates . These include (i) raising bank capital, and (ii) further developing interest-rate hedging instruments. References Fernald , J. G. , M. M. Spiegel , and E

Mr. Tamim Bayoumi and Mr. Yunhui Zhao

: Parameter Calibration The discount factor of the renters (β R,ss ) is calibrated by matching the steady-state interest rate to the average deposit rate in China. To proxy for the steady-state level, we use the average one-year benchmark deposit rate in China from 2000 to 2018 (from People’s Bank of China), which equals 2.42 percent. The weight on housing services by renters ( j) and weight on housing services by investors (κ) are chosen to match another steady-state object, which is the housing GDP as a share of the total GDP. That is, we set the following expression