Research questions rationale details the reasons for conducting the study. The primary purpose of the study is to present the existing outcome of the impact of market liberalization on the commercial banks operating in China. It is important to note that the commercial banks to be considered in this study would be either domestic or foreign or both. Based on the existing knowledge acquired that interest rate marketization impacts commercial banks differently, with relation to the size, it would be ideal to include three different categories of China’s commercial banks. In particular, the research question will cover rural, small city, and large commercial banks. Through the first question identified above, the study focuses on the direct and indirect impact of liberalization on active commercial banks. Essentially, this question will propel the study to investigate how the three levels of commercial banks view these reforms and responded to them in their internal working operations and tactics. We will gain an in-depth understanding of how different commercial banks attribute to loans and deposit spreads in an era where interest rate marketization has gained recognition from the international communities. We aim to shed more light and put into perspective how these reforms have contributed to the Chinese financial banking sector.
The second question is significant in demonstrating the contribution of these reforms in economic growth and financial stability currently being reported or evidenced by China. Borrowing from numerous studies conducted over the years, this question is ideal to show the correlation between reforms and progress witnessed in China over the past three to four decades. Through the reforms, the question will highlight instances where commercial banks have been at the forefront in facilitating economic growth and developments across China through increased loans and resource allocations.
The third question will put into perspective the adaptability and applicability of China’s financial reforms in the banking sector industry to other financial sectors across the globe. As indicated in the question, we will focus on developing and underdeveloped countries. Nonetheless, this does not mean that these reforms are not applicable in developed counties as well. It is a precise decision that has been taken to focus on underdeveloped and developing countries. The rationale for this decision is based on the fact that China was categorized as an upper developing country when it launched these reforms over three decades ago.
Two theories of economics by Irving Fisher and Laissez-Faire will be used to base arguments. On the one hand, the Fisher Effect economic theory by Irving Fisher states that the real interest rates amounts the nominal interest rate subtracted the expected inflation rate (Tymoigne, 2006). This theory has limitations whereby economic prosperity, confidence and prices of assets tend to rise, rendering interest rates ineffective in reducing demand. This is defined as elasticity of demand to interest rates. On the other hand, Laissez-Faire theory argues that the, “less the government is involved in the economy, the better the business will be, and by extension, society as a whole” (Hill, 1964). The fundamental beliefs behind this theory is that competition constitutes a “natural order” that drives how economy runs. The aspect of “natural order” indicate that the government has limited to no roles in interfering with businesses and industrial affairs. This theory criticizes and disapproves any type of legislation or oversight by the government, which includes but not limited to interest rate regulations, corporate taxes and trade restrictions. These theories will be applied to base arguments on China’s interest rate liberalization reforms.
A comprehensive review of the literature, case studies, article journals, newspaper reports and other reputable sources related to interest rate marketization in China and the underlying impact on commercial banks will be included in this review. An assumption that the impact of reforms were evident after 10 years since the inception in 1995 will be applied. This is to mean that materials to be considered fit for this research would have to be published from 2005 and beyond. This represent the criteria to be applied for inclusion and exclusion of resources. A detailed comparison to show the similarities and differences as reported by different researchers will be provided to help in guiding the direction of the study. It is important to note that literature review is treated as secondary data that will be compared with primary data to be collected to show correlation of the issue at hand.
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