Abstract: The interest rate control by Chinese government since 1980's can be divided into two periods, namely strict control and asymmetric control. During both periods the interest rate control distorted the formal and informal financial markets, and became the underlying reason for excessive profit of banking industry, financial difficulties of SMEs, crisis of private lending and so on. The correction of the market distortion initiated by interest rate control notably leads to interest rate liberalization. However, the current Chinese banking laws and regulations can't adapt to the requirement of the situation under interest rate liberalization, because of inherent flaws such as misconception of benchmark interest rate, power abuse and unclear objectives of regulators. Consequently, the rule of interest rate control should be reconstructed, the concept of benchmark interest rate should be clearly defined, the power of controlling interest rate by government should be restrained, the goal and approach of interest rate control should be changed, and some supporting systems like deposit insurance, financial market access and bankrupt rule of financial institutions should be introduced. Additionally, the legal liability of private lending transaction over certain interest rate limit should be emphasized according its profit-making or nonprofit-making nature.