Changing China

Giant on the move

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Interest rate barometer

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Chinese banking regulators should monitor more closely the lending activities of underground banks, where interest rates react more quickly to changing economic conditions than do rigid state-set interest rates.

“Historically, these interest rates change more rapidly to changes in market liquidity,” Gao Shanwen, Essence Securities’ chief economist, said at the Reuters China Investment Summit.

“They are an important barometer that should be monitored more closely,” he said.

According to market lore, some of these illegal banks are formed by bank employees or others with access to bank funds, which are then lent outside of official channels, said Gao.

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