Nexus of Interest Rate Liberalization and Loan Pricing: Evidence from Entrusted Loans in China

Using a sample of entrusted loans, a typical type of shadow banking in China, from 2008 to 2017, we examine the impact of interest rate liberalization on loan pricing applying a different-in-difference approach. We find that the spreads of private and non-equity affiliated enterprises have decreased significantly with interest rate liberalization. The effect of the liberalization process is also heterogeneous, considerably reducing the spread of financially constrained entities and those who are located in financially developed provinces. This study will help to evaluate the interest rate liberalization reform and provide new evidence on loan pricing of shadow banking.