Central bank lending facility and investment efficiency of non-SOEs: evidence from China

Abstract

Despite China's increasing use of central bank lending facilities over the past decade, their effectiveness and economic impacts on the real economy remain unclear. We examine the effect of the medium-term lending facility (MLF), a representative of central bank lending facilities in China, on the investment efficiency of non-state-owned enterprises (non-SOEs) during 2014: Q3–2020: Q4. We find that increased liquidity through MLF operations improves the investment efficiency of Chinese non-SOEs by reducing their credit constraints, agency costs, and operating risk. The results hold even after controlling for the endogeneity of central bank lending facilities. We also show that the effect is more pronounced for non-SOEs with smaller sizes and higher executive compensation and those in markets with weaker banking competition and financial development. Our findings suggest that lending facility measures can be a practical approach to address the limitations of traditional policy frameworks and support private economic activities.