China has often avoided using monetary policy to the same extent as many developed countries. The central bank of China has historically been concerned with keeping inflation under control and not needed monetary policy as a tool to stimulate economic growth. This focus on reasonable inflation since the mid 1990s has helped to sustain much of China’s growth, but as growth slows it appears that the People’s Bank of China may begin to experiment more with changes in interest rates.
Many of the actions of the PBOC of China are fiscally focused and are given with insufficient explanation. While this often helps to spur economic growth, it is a common criticism of the country’s central bank. However, China has recently announced plans to lower interest rates, something that has not happened in the two years. This change will certainly help speed up China’s growth, but the central bank claims that the current level of growth is fine and is not the reason behind these monetary reforms. Instead, the lower interest rates are aimed at helping companies refinance their debt at lower rates and decrease the total level of corporate leverage.
Whatever the reason behind the PBOC’s decision to lower interest rates, it is a sign that the country’s monetary policy is beginning to liberalize. In addition to the drop in rates, banks are also allowed more freedom in their deposit rates. This will hopefully spark more competition among banks in attracting consumers in an environment with already high levels of savings. It may be a while until interest rates are fully liberalized in China or the central bank uses monetary policy as actively as the United States or the Eurozone, but this is a definite move towards a more free financial system in China.