Low Interest Rate Environment and Capital Mismatch: Based on the Economic Environment of China

Research Article
Open access

Low Interest Rate Environment and Capital Mismatch: Based on the Economic Environment of China

Yuchen Wang 1*
  • 1 School of Economics and Management, North China Electric Power University, Beijing, China    
  • *corresponding author NiBSKzSz@hotmail.com
AEMPS Vol.191
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-80590-189-1
ISBN (Online): 978-1-80590-190-7

Abstract

A notable feature of the Chinese economy over the past decade has been the continuous decline in nominal interest rates. As of May 2025, the one-year loan prime rate (LPR) had gradually declined from 5.3% to 3.1% (data from the People's Bank of China (PBoC). Although conventional wisdom suggests that a low interest rate environment can stimulate economic activity, many studies in recent years have shown that a persistently low interest rate environment can exacerbate capital misallocation in the credit market, leading to economic contraction. This paper studies the impact of the current low interest rate environment on the credit market under China's economic system by constructing an Agent-Based Model. The study found that a sustained low interest rate environment will exacerbate the capital mismatch between state-owned enterprises and private enterprises in the credit market, which in turn will lead to a decline in the average return on investment. Structural reforms can eliminate the adverse effects of this phenomenon, but there are still difficulties in practice.

Keywords:

Low interest rates, capital misallocation, financial frictions, agent-based model, structural reform

Wang,Y. (2025). Low Interest Rate Environment and Capital Mismatch: Based on the Economic Environment of China. Advances in Economics, Management and Political Sciences,191,66-71.
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References

[1]. Asriyan, V., Laeven, L., Martin, A., Van der Ghote, A., & Vanasco, V. (2021). Falling interest rates and credit misallocation: Lessons from general equilibrium.

[2]. Dosis, A. (2023). Low Interest Rates, Capital Misallocation and Welfare. ESSEC Business School Research Paper, (2023-02).

[3]. Hsieh, C. T., & Klenow, P. J. (2009). Misallocation and manufacturing TFP in China and India. The Quarterly journal of economics, 124(4), 1403-1448.

[4]. Song, Z., Storesletten, K., & Zilibotti, F. (2011). Growing like china. American economic review, 101(1), 196-233.

[5]. Sun, G., & Jia, J. (2015). Defining China’s shadow banking and assessing its scale: seen in terms of the creation of credit money. China’s Soc. Sci, 239(11), 92-110.

[6]. Sun, G., & Jia, J. (2015). Defining China’s shadow banking and assessing its scale: seen in terms of the creation of credit money. China’s Soc. Sci, 239(11), 92-110.

[7]. Lan, X., & Topp, G. (2024). How China Works. Springer Books.

[8]. Chen, S., & Lin, B. (2019). Dual-track interest rates and capital misallocation. China Economic Review, 57, 101338.

[9]. Liu, Z., Wang, P., & Xu, Z. (2021). Interest rate liberalization and capital misallocations. American Economic Journal: Macroeconomics, 13(2), 373-419.

[10]. Wang, H., Wang, H., Wang, L., & Zhou, H. (2019). Shadow banking: China's dual-track interest rate liberalization (Vol. 2606081). SSRN.

[11]. Chong-En, B., & Qiong, Z. (2015). The return on capital in China and its determinants. China Economist, 10(3), 20.

[12]. Lin, J. Y., Cai, F., & Li, Z. (1998). Competition, policy burdens, and state-owned enterprise reform. The American economic review, 88(2), 422-427.

[13]. Zhong, N., Liu, Z., He, J., & Su, C. (2016). The structural problem of China’s non-financial corporate debt. Economic Research Journal, 51(07), 102-17.


Cite this article

Wang,Y. (2025). Low Interest Rate Environment and Capital Mismatch: Based on the Economic Environment of China. Advances in Economics, Management and Political Sciences,191,66-71.

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About volume

Volume title: Proceedings of ICEMGD 2025 Symposium: The 4th International Conference on Applied Economics and Policy Studies

ISBN:978-1-80590-189-1(Print) / 978-1-80590-190-7(Online)
Editor:Florian Marcel Nuţă , Xuezheng Qin
Conference website: https://www.icemgd.org/
Conference date: 20 September 2025
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.191
ISSN:2754-1169(Print) / 2754-1177(Online)

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References

[1]. Asriyan, V., Laeven, L., Martin, A., Van der Ghote, A., & Vanasco, V. (2021). Falling interest rates and credit misallocation: Lessons from general equilibrium.

[2]. Dosis, A. (2023). Low Interest Rates, Capital Misallocation and Welfare. ESSEC Business School Research Paper, (2023-02).

[3]. Hsieh, C. T., & Klenow, P. J. (2009). Misallocation and manufacturing TFP in China and India. The Quarterly journal of economics, 124(4), 1403-1448.

[4]. Song, Z., Storesletten, K., & Zilibotti, F. (2011). Growing like china. American economic review, 101(1), 196-233.

[5]. Sun, G., & Jia, J. (2015). Defining China’s shadow banking and assessing its scale: seen in terms of the creation of credit money. China’s Soc. Sci, 239(11), 92-110.

[6]. Sun, G., & Jia, J. (2015). Defining China’s shadow banking and assessing its scale: seen in terms of the creation of credit money. China’s Soc. Sci, 239(11), 92-110.

[7]. Lan, X., & Topp, G. (2024). How China Works. Springer Books.

[8]. Chen, S., & Lin, B. (2019). Dual-track interest rates and capital misallocation. China Economic Review, 57, 101338.

[9]. Liu, Z., Wang, P., & Xu, Z. (2021). Interest rate liberalization and capital misallocations. American Economic Journal: Macroeconomics, 13(2), 373-419.

[10]. Wang, H., Wang, H., Wang, L., & Zhou, H. (2019). Shadow banking: China's dual-track interest rate liberalization (Vol. 2606081). SSRN.

[11]. Chong-En, B., & Qiong, Z. (2015). The return on capital in China and its determinants. China Economist, 10(3), 20.

[12]. Lin, J. Y., Cai, F., & Li, Z. (1998). Competition, policy burdens, and state-owned enterprise reform. The American economic review, 88(2), 422-427.

[13]. Zhong, N., Liu, Z., He, J., & Su, C. (2016). The structural problem of China’s non-financial corporate debt. Economic Research Journal, 51(07), 102-17.