Has China's Monetary Policy Reform Prevented Enterprises from “Being Diverted out of the Real Economy”？ Evidence Based on the Medium-term Lending Facility
LI Zengfu, LI Mingjie, TANG Xudong
School of Economics and Management, South China Normal University; School of Business Administration, South China University of Technology
Summary:
As the Central Bank, the People's Bank of China(PBC) has continued to implement measures to maintain stable economic development. Notably, the PBC continues to use the Medium-term Lending Facility (MLF) as an important tool for achieving its monetary policy intentions and to improve firms' expectations, investment prospects and financing structures. Although a number of studies discuss the impact of the MLF, little research examines how the MLF affects the financialization of enterprises. This paper examines this relationship with the aim of clarifying the role that the MLF plays in preventing enterprises from “being diverted out of the real economy.” This paper uses manually compiled data on the loans and interest rates provided by the MLF on a case-by-case basis. Based on quarterly data from non-financial listed companies from 2014 to 2021, a panel data analysis is conducted to empirically test the impact of the MLF on corporate financialization. The results show that a moderate reduction in the MLF interest rate significantly reduces the level of financialization of firms. Specifically, moderate decreases in the MLF interest rate are found to lead to moderate declines in bank loan interest rates, thus reducing the financing costs of enterprises, ensuring sufficient mid-term and long-term loans for enterprises, improving the investment level of enterprises and alleviating the phenomenon of being diverted out of the real economy. Further analysis shows that the above effects are more significant for enterprises that make active speculative transactions and have strong financing constraints, a heavy tax burden and low levels of regional financialization. These results suggest that the MLF plays a beneficial role in reducing the financing costs of the real economy and promoting long-term corporate financing and investment. Accordingly, the MLF plays a significant role in restraining the phenomenon of being diverted out of the real economy and promoting steady economic development. The MLF can also play a positive financing role in injecting low-cost capital into the real economy. This additional low-cost capital effectively reduces the financing costs of enterprises, improves their long-term financing and enhances their investment capacity. To achieve this, the MLF makes full use of the operational characteristics of banks and the transmission mechanism of the credit market. Following the successful implementation of the MLF, the PBC created the Targeted Medium-term Lending Facility (TMLF) to provide clearer lending targets and more favorable interest rates and to prevent private enterprises from being diverted out of the real economy,and the economic impact of the new facility is an important topic for future research. The MLF has a relatively effective micro-transmission mechanism that matches the economic context and can make full use of the pricing mechanism of banks. As the MLF is also highly policy-oriented, policies can be set to make full use of the market mechanism to restrain enterprises from being diverted out of the real economy. As policy can be used to stabilize market expectations, combined with the reform of the loan prime rate mechanism, the MLF’s micro-transmission mechanism enables funds to be precisely targeted in the policy-oriented real economy. The MLF is a major reform initiative and innovation of the PBC. In the future, the MLF is likely to be updated and improved so as to continually optimize its economic impact. Given the increasingly important role the MLF is playing in the monetary policy system, any improvement of the policy is likely to have a positive impact on the real economy. Overall, the MLF is expected to provide increasingly strong and high-quality support for the real economy, improve the stability of the macroeconomic market and contribute to China' new journey toward modernization.
李增福, 李铭杰, 汤旭东. 货币政策改革创新是否有利于抑制企业“脱实向虚”？[J]. 金融研究, 2022, 510(12): 19-35.
LI Zengfu, LI Mingjie, TANG Xudong. Has China's Monetary Policy Reform Prevented Enterprises from “Being Diverted out of the Real Economy”？ Evidence Based on the Medium-term Lending Facility. Journal of Financial Research, 2022, 510(12): 19-35.
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