A Study On The Effectiveness Of Monetary Policy Transmission In China

Being one of the most important tools of macro-control,how monetary policy affects real economy-monetary policy transmission mechanism-has been widely discussing.Different from western countries who have sound market economy,China is in a period of economic transition,which makes monetary policy transmission become complicated.On one hand,China has been undertaking a series of market-oriented reforms,and Chinese economy has entered a new stage called "New Normal".In this context,monetary policy began to shift from quantitative control to price regulation.That makes both interest rate channel and credit channel work in China.On the other hand,entrusted loans,as a typical shadow banking,have been flourishing recently in China.It provides a conduit for enterprises to reallocate capital while circumventing financial regulations,which would have an impact on monetary policy transmission.How does interest rate channel of monetary policy work?What is the influence of shadow banking on credit channel of monetary policy?These questions need to be answered.This paper reviews the relevant research about interest rate channel and credit channel of monetary policy at the beginning.In order to lay the foundations for later empirical studies,this paper combs the practice of recent monetary policy and development status quo of entrusted loans in China.Then,this paper conducts empirical studies from three aspects:"how does monetary policy affect loan price?","how does monetary policy affect scale of loan?","how does monetary policy affect requirement for mortgage or guarantee and loan maturity?".Firstly,using a sample of entrusted loans of listed companies in China,this paper theoretically and empirically examines the effectiveness of interest rate channel of monetary policy.The research finds that monetary policy significantly affects interest rate for loans.There is a significant mediation effect in interest rate transmission and monetary policy affects lending rate by influencing the money market rates,Shibor.Further research indicates that under the background of financial discrimination,the interest rate channel of monetary policy behaves differently for different firms.On one hand,the loan price of state-owned enterprises which have the financial privilege are sensitive to changes in monetary policy;on the other hand,loan prices of private enterprises are always expensive,loose monetary policy does not reduce lending rates.These findings have obvious policy implications.In order to improve the effectiveness of interest rate channel of monetary policy,we need to deepen the reform of financial system and promote interest rate marketization.Secondly,using samples of entrusted loans,this paper empirically examines the effectiveness of credit channel of monetary policy in China from perspective of shadow banking.The research finds that monetary policy significantly affects the scale of entrusted loan.On one hand,empirical analysis based on Aggregate Financing to the Real Economy(AFRE)shows that tight monetary policy decreases the bank credit,on the contrary,it increases the scale of entrusted loans;on the other hand,empirical analysis based on entrusted loan data of listed companies shows that firms are more likely to participate in entrusted loans extensively,and issue more loans intensively during the monetary policy contraction phase.These results mean that shadow banking has weakened the effectiveness of credit channel of monetary policy.Further evidence indicates that the mechanism is that firms outside the system have to obtain capital through shadow banking system.In order to improve the effectiveness of credit channel of monetary policy,the PBC’s intermediate targets should include shadow banking.Thirdly,thanks to hand-collected data of entrusted loans of listed companies,besides examining the impact of monetary policy on supply of credit and loan price,this paper also empirically studies how monetary policy affects requirements for mortgage or guarantee and loan maturity.The research finds that monetary policy significantly affects contract design of entrusted loans.On one hand,borrowers are more likely to provide mortgage or guarantee during the monetary policy contraction phase,and more tight monetary policy makes more stringent requirements for a mortgage;on the other hand,tight monetary policy is significantly negatively correlated with the loan maturity.Further studies indicate that the influence of monetary policy on loan terms behaves differently for different firms.Compared with borrowing firms which are equity connected with lenders,state-owned,or with low information asymmetry,tight monetary policy has a greater effect on the requirements for mortgage or guarantee and loan maturity of firms which are not connected with lenders,private,or with high information asymmetry.These findings indicate that in addition to reducing supply of credit and loan price,tight monetary policy also has an impact on corporate investment and financing by making more stringent requirements for mortgage and guarantee or shortening the loan maturity.This paper provides fresh micro-level evidence of broad credit channel of monetary policy in China.Finally,this paper concludes the major research findings,and develops policy recommendations based on the results of the study.It proposes the research limitations as well as implications for further studies on monetary policy transmission in China.