This paper examines the causal relationship among interest rates, savings, and income in mainland China over the period 1952 to 1993. Cointegration test and Baynesian vector autoregression are employed for empirical testing. The empirical evidence from the cointegration test confirm that there is a stable long run relationship among interest rates, savings, and income. The BVAR causality test shows the unidirectional causality runs from interest rates to savings, and to income. Therefore, interest rates liberalization can promote capital accumulation, which, in turn, sustains economic growth. If, however, the Chinese government continues to exert direct control and influence on financial liberalization, the spontaneous forces which to encourage institutional innovation and adoptive behavior may be limited.
