Shadow banking and SME investment: Evidence from China's new asset management regulations

China's initiatives to maintain financial stability by curbing shadow banking activities through tighter financial regulation may have unexpected consequences. Using a difference-in-differencein-differences (DDD) strategy around China's New Asset Management Regulations (NAMR), we examine the effect of shadow banking contraction on SME investment. The result reveals a significant decline in SME investment following the introduction of the regulatory policy, with a more pronounced negative effect observed among politically unaffiliated and high-tech enterprises. The channel analysis demonstrates that the regulatory policy induces financial frictions, leading to an increase in financing costs for SMEs and subsequently causing a decline in investment. Furthermore, we find that the regulatory policy also reduces both investment efficiency and total factor productivity in enterprises. Collectively, our results imply that under financial repression, shadow banking potentially acts as a crucial financial resource for SME growth. However, tighter regulatory policies, without corresponding supportive measures, might result in detrimental impacts on the real economy.