Abstract
This study examines the effect of targeted easing (TE), an unconventional monetary policy designed to reduce reserve requirement ratios (RRR) of selected financial institutions, on reducing financing constraints of Chinese small businesses. Using a longitudinal sample of listed small businesses between 2003 and 2018, we find that the implementation of a TE policy significantly reduces financing constraints of small businesses as measured by the cash flow sensitivity. In addition, the policy effect is stronger when reductions in RRR are targeted at financial institutions specialized in small business lending than at banks with a threshold level of small business loans. We also document that small businesses with larger financing needs benefit significantly more from the TE policy and experience a larger reduction in their financial constraints. Moreover, the TE policy effect is more salient in state-owned small businesses than privately controlled enterprises. These results are also robust to alternative measures of financing constraints.
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Notes
Data obtained from the Office of the United States Trade Representative.
Data obtained from Ministry of Industry and Information Technology of the People’ Republic of China, “The 2016–2020 Plan to Promote Development of Small and Medium Size Enterprises.”
PBC also implemented a TE policy for agricultural firms and agricultural financial institutions, which is not a focus of this paper.
Accessed from European Central Bank https://www.ecb.europa.edu/press/pr/date/2016/html/pr160310_1.en.html
More specifically, these are agricultural firms with revenue less than 5 million RMB, manufacturing firms with revenue less than 20 million RMB and employment less than 300, construction firms with revenue less than 60 million RMB, wholesale business with revenue less than 50 million RMB, retail businesses with revenue less than 5 million RMB, transportation businesses with revenue less than 30 million RMB and employment less than 200, storage businesses with revenue less than 10 million RMB and employment less than 200, hotel businesses with revenue less than 20 million RMB and employment less than 200, restaurants with revenue less than 20 million RMB and employment less than 100, information industry with revenue less than 10 million RMB and employment less than 100, real estate industry with revenue less than 50 million RMB, and leasing business with revenue less than 80 million RMB and employment less than 300.
When two rounds of TE policies were implemented in the same quarter, we add RRR reductions of both rounds to capture the total reduction in this quarter. For example, the April 2015 TE reduces RRR by 0.5% and the June 2015 TE reduces RRR by another 0.5%. We code Q2 2015 TE as 1% by adding reductions in both rounds. When the targeted RRR reduction is contingent based on certain criteria instead of a set ratio, we code TE using the average reduction ratio. For example, the August 2018 TE specifies that banks whose small business lending growth exceeds 1.5% of all bank loan growth and whose small business lending amount accounts for at least 1.5% of all existing loan amount enjoy a 0.5% reduction in RRR, and banks whose small business lending growth exceeds 10% of all bank loan growth and whose small business lending amount accounts for at least 10% of all existing loan amount enjoy a 1.5% reduction in RRR. In this case, we code the TE reduction rate as 1% using the average of 0.5% and 1.5%.
We use suest commands in Stata 15 to perform chi-square tests.
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Acknowledgments
We are grateful for insightful comments provided by paper discussants and conference participants at the 2019 Cross Country Perspectives in Finance Conference in China and the 2019 CCPF Symposium in Mauritius on early versions of this paper.
Funding
This project is supported by the National Natural Science Foundation of China Grant No. 71473039 “The Asymmetric Effect of Monetary Policy Transmission Mechanism: Examination from the Micro Angle” and Grant No. 71673048 “Information Disclosure and Market Competition under Information Asymmetry: Theory, Evidence and Policy,” and Natural Science Foundation of Fujian Province in China Grant “Structural Monetary Policy Transmission Mechanism: Micro foundation and Spillover Effects.”
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Lin, C., He, L. & Yang, G. Targeted monetary policy and financing constraints of Chinese small businesses. Small Bus Econ 57, 2107–2124 (2021). https://doi.org/10.1007/s11187-020-00365-5
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DOI: https://doi.org/10.1007/s11187-020-00365-5