The Effect of interest rate Liberalization on the risk of commercial banks in China - Dissertation Example

The paper has discussed illustrates a mixed picture after interest rate liberalization and its associated risk on the commercial banks in China. Historically China is a strong believer in the planned economy where strict government intervention under a single party rule always has the last word regarding the policies to be prioritized and implemented. Though after the iron rule of Mao-era China has learned under Deng Xiaoping that FDI and capitalist exploitation is not the same thing but the people as well as the government are still skeptical about their nature of the operation.

Over the past couple of decades, China has realized huge GDP growth through export-oriented international trade. This on one hand, strengthened the export based industries on the other weekend the indigenous industries especially those indulged in import substitution. Again amidst this prosperity, China has slipped down considering the GINI coefficient and that illustrates a rising inequality i.e. an increasing gap between the rich and poor people. Eminent academicians hold the view that with China’s present model rich are becoming richer and poor are becoming poorer.

The development is mainly urban centric and rural China is subject to stagnation and a much higher unemployment than the urban areas.. es cemented their feet under the strict rule of Mao Ze Dong who opted for self sufficiency and betterment of the common rather than external dependency and flourish of the few (Chi, 1992, pp.75-84; Buchanan, 2012, p.24). Mao believed in a closed door policy that meant isolation from the rest of the world regarding economic transaction. Though diplomatic relation with Soviet Russia along with many east European nations was encouraged but that never translated into economic exchange.

During Mao’s rule the growth rate of China was stable but slow and often subject to stagnation. Though, such view has many opposing facts and evidences illustrated through literature. However after Mao’s death Deng Xiaoping became the most prominent figure in Chinese politics and soon realized the need to embrace the globalization in order to boost the Chinese economic growth. The current topic of discussion that refers to interest rate liberalization and risk to commercial banks is an important aspect to discuss.

However, financial liberalization along with interest rate liberalization often considered by the economists as the last stage of liberalization process that have went through and met several other steps directed towards the liberalization of the economy (Chow, 2005). Welcoming FDI into an economy might be considered as the first step towards liberalization. In initial days China lacked both the legal frame work as well as their policy towards globalization was skeptic and the legal frame work governing the same was week.

But the scenario started changing from mid 80’s and historically Hong Kong remained the prime source of foreign direct investment provider to China. Such investments were mainly towards labor intensive sectors and high end technological and capital intensive