Corporate Investment and Shadow Banking Channel of Monetary Policy

Abstract

This paper studies the heterogeneous response of State-owned enterprises (SOEs) and nonState-owned enterprises (nonSOEs) to the monetary policy. I find that SOEs’ investment declines by 5% - 12% more than nonSOEs after a 100 basis point monetary tightening shock using recent data from China. I provide evidence that a shadow banking channel could explain the empirical results. I show that, via a rise of shadow banking relative to bank loans, a monetary tightening shock raises the credit spread of SOEs to nonSOEs, which further slows down the investment of SOEs compared to nonSOEs.