Does the Interest Rate Liberalization Reform Really Weaken the Effect of Monetary Policy on Bank Lending Channel?

The traditional view holds that interest rate liberalization (IRL) weakens the bank lending channel (BLC) by reducing financial frictions. However, this view may not hold in developing countries due to institutional factors. Using quarterly panel data from 39 Chinese commercial banks between 2007 and 2023 and incorporating both quantity- and price-based monetary policy indicators, we find that IRL generally reduces the effectiveness of the BLC. However, this effect is heterogeneous: it is more pronounced for non-state-owned banks and long-term loans, but limited for collateralized lending. Further results indicate that the effect also varies with the ownership structure of borrowing firms. In addition, banks' funding structures do not confound the identification strategy. These findings suggest that policymakers should carefully account for institutional conditions—particularly ownership structures and market segmentation—when implementing interest rate liberalization reforms, as these factors critically influence the monetary policy transmission mechanism.