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U.S. Monetary policy financial spillovers and the time-varying impact on China’s real financing costs

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  • Feng, Nan
  • Cai, Jinfeng

Abstract

This paper examines U.S. monetary policy spillovers to China through market-based real financing conditions. We decompose borrowing costs into sovereign, term, and default risk premia to identify the channels through which external shocks affect domestic financing. U.S. monetary policy surprises are identified from changes in federal funds futures within the one-day Federal Open Market Committee (FOMC) announcement window. Using a time-varying parameter proxy SVAR, we show that U.S. rate hikes raise short- and long-term interest rates in China, widen all three risk premia, and tighten real financing conditions in the short to medium term. Output and CPI display limited short-run resilience but weaken at medium horizons as financial tightening intensifies. The results imply that shielding the real economy from external monetary spillovers requires coordinated policies that contain risk-premium repricing and strengthen financial resilience.

Suggested Citation

  • Feng, Nan & Cai, Jinfeng, 2026. "U.S. Monetary policy financial spillovers and the time-varying impact on China’s real financing costs," Finance Research Letters, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:finlet:v:100:y:2026:i:c:s1544612326004551
    DOI: 10.1016/j.frl.2026.109926
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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