Section 1 The Source and Nature of Interest

Interest is the remuneration paid by the borrower to the lender in the lending relationship.

To examine the nature of interest, we must analyze it in conjunction with its sources.

(1) Marx’s theory on the source and essence of interest. Interest, by its very nature, is a special form of surplus value and a part of profit.

(2) Western economists’ theories on the source and nature of interest are mostly divorced from the economic relationship itself and cannot reveal the true source and nature of capitalist interest.

(3) Chinese scholars believe that in a socialist society dominated by public ownership, interest comes from the increase in national income or social wealth.

In real life, interest is regarded as a general form of income, leading to the capitalization of income.

Section 2 Types of Interest Rates

Interest rate is the ratio of the amount of interest to the amount of loaned capital within a certain period of time.

There are two calculation methods for interest rates: simple interest method and compound interest method.

Interest rates can be divided into different types according to different standards.

Section 3 The Determination and Influencing Factors of Interest Rates

There are also many theories about the determination of interest rates. Among them, Marx’s interest rate determinism believes that the amount of interest depends on the total profit. The interest rate depends on the average profit rate. Western interest rate determination theories focus on the fact that interest rate changes depend on the relationship between supply and demand. There are three main interest rate determination theories.

The influencing factors of interest rate changes mainly include economic factors, policy factors and institutional factors.

(1) Economic factors include the impact of economic cycles, inflation, taxes, etc. on interest rates.

(2) Policy factors refer to the impact of a country’s monetary policy, fiscal policy, exchange rate policy and other economic policies on interest rates.

(3) Institutional factors mainly refer to the interest rate situation under interest rate control.

The factors that determine and influence my country's interest rates mainly include the average level of profits, the supply and demand of funds, the extent of price changes, the international economic environment and policy factors, etc.

(1) The average level of profit refers to the interest rate in the socialist market economy which is also determined by the average profit rate.

(2) The supply and demand situation of funds means that when the supply of borrowing capital exceeds the demand, the competition between lenders and borrowers will cause the interest rate to rise; when the supply exceeds the demand, the interest rate will fall.

(3) The extent of price changes restricts the level of nominal interest rates.

(4) The international economic environment refers to international capital flows, commodity competition, foreign exchange reserves and foreign investment policies, which will all have an impact on interest rates.

(5) Policy factors refer to the interest rate, which depends on the country’s need to regulate the economy and is a tool to achieve economic goals.

Section 4 The functions and effects of interest rates

As an economic lever, interest rates have five economic functions and play an important role in the economy.

(1) The general functions of interest rates include intermediary function, adjustment function, distribution function, power function and control function.

(2) The role of interest rates is reflected in macroeconomic and microeconomic activities.

The role of interest rates requires certain environments and conditions, including:

(1) Market-based interest rate determination mechanism, that is, the interest rate level is determined by market supply and demand;

(2) Flexible interest rate linkage mechanism, that is, the linkage relationship in which one interest rate changes and other interest rates change accordingly;

(3) Appropriate interest rate level, that is, the interest rate level should not be too low or too high High;

(4) Reasonable interest rate structure, that is, reasonable interest rate term structure, industry structure and regional structure, etc.

In order for interest rates to fully play their role in my country's socialist market economy, the market-oriented reform of interest rates should be gradually carried out.