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Targeted monetary policy, SMEs’ loan availability, and corporate investment: evidence from China

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Listed:
  • Renzhi Li

    (Zhongnan University of Economics and Law, School of Finance
    Johns Hopkins University, School of Advanced International Studies)

  • Caihong Chen

    (Zhongnan University of Economics and Law, School of Finance)

  • Zhijie Han

    (Peking University, School of Economics)

  • Yuwei Wang

    (Zhongnan University of Economics and Law, School of Finance)

Abstract

This paper explores the causal effect of targeted monetary policy, specifically targeted reserve requirement ratio cuts (TRRRCs), on small and micro enterprises (SMEs) during the Covid-19 pandemic in China. Using biannual Chinese firm-level data and a difference-in-difference identification strategy, we find that targeted monetary policy significantly increases SMEs’ loan availability. Mechanism tests show that the policy boosts loan availability by enhancing bank competition and lowering financing costs. Additionally, the positive effects are more pronounced for early-stage SMEs, larger SMEs, SMEs with higher financial constraints, SMEs in less-developed regions, and SMEs in areas with higher bank density. We also find that the policy primarily stimulates SMEs’ long-term loan availability. However, SMEs tend to reduce corporate investment and financial asset investment but use bank credit as a substitute for trade credit to alleviate financial constraints among business partners. Overall, this study highlights the positive impact of targeted monetary policy in reducing SMEs’ financial burdens and provides insights into how such policies affect SMEs’ business decisions during “black swan” events.

Suggested Citation

  • Renzhi Li & Caihong Chen & Zhijie Han & Yuwei Wang, 2025. "Targeted monetary policy, SMEs’ loan availability, and corporate investment: evidence from China," Small Business Economics, Springer, vol. 65(4), pages 2465-2491, December.
    • Handle: RePEc:kap:sbusec:v:65:y:2025:i:4:d:10.1007_s11187-025-01063-w
    DOI: 10.1007/s11187-025-01063-w
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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