The paper sheds light on the interplay between monetary policy, the commercial banking sector and the shadow banking sector in mainland China by means of a nonlinear stochastic general equilibrium(DSGE) model with occasionally binding constraints. In particular, we analyze the impacts of interest rate liberalization on monetary ploicy tranmission as well as the dynamics of the parallel shadow banking sector. Comparion of various interest rate liberalization scnarios reveals that monetary policy results in increased feed-through to the lending and investment under complete liberalization. Furthermore, tighter regulation of interest rates in the commercial banking sector in China leads to an increase in loans provided by the shadow banking sector.