Zhao Chen: This paper provides empirical evidence about implicit interest rates in China's banking sector, a topic that has not been well addressed by existing literature. To my understanding, the contribution of this paper is not only that it provides evidence from a developing country on this topic, but also that it is very important information for policymakers concerning further financial deregulation in China. There is a large growing literature on financial sector friction and misallocation in China. It is without question that China's financial sector needs to deregulate further and interest rate liberalization will of course be one of the main tasks of financial deregulation. Nonetheless, the Chinese government needs to know more about the micro aspects of the financial sector to have a smoother transition toward a deregulated financial system.
The authors find that the implicit interest rate accounts for 70–78 percent of the explicit interest rate in...