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

Renzhi Li (), Caihong Chen (), Zhijie Han and Yuwei Wang ()
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Renzhi Li: Zhongnan University of Economics and Law, School of Finance
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

Small Business Economics, 2025, vol. 65, issue 4, No 15, 2465-2491

Abstract: 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.

Keywords: Targeted monetary policy; Small-and-micro enterprises (SMEs); Loan availability; Corporate investment; Trade credit (search for similar items in EconPapers)
JEL-codes: E52 E58 G32 L20 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11187-025-01063-w

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