The Credit Channel of Monetary Policy Transmission in China: Evidence from Empirical Research

The impact of monetary policy on bank lending may not be just reflected in the total amount of loan, it can be reflected in the loan with different maturities in different banks. Facing the impact of monetary policy, banks not only adjust the amount of loan but also adjust the maturity structure of loan, and different banks may have different reactions. Using monthly data between January 2010 and December 2012, this paper attempts to verify the existence of bank-lending channel of China's monetary policy by examining how large banks and small banks respond differently in their long-term and short-term loans. Bank funding by commercial paper is taken into account in oder to differentiate the impact of demand side from that of supply side. Results show: there is evidence supporting the existence of a bank-lending channel of China's monetary policy transmission; traditional interest rate channel is not enough to explain the behavior of bank loans; large banks are greatly affected by the benchmark lending rate, while small banks significantly by quantitative monetary policy. Evidences show that nowadays the lending channel plays a greater role than the interest rate channel. In order to make the interest rate channel run smoothly, and play a greater role in the future, we suggest: strengthen efforts to support small and medium banks to change the way they operate which is too robust; reduce dependence on large banks to provide funds, and turn to small and medium-sized banks and financing platform, so make the market's sensitivity to interest rate to a reasonable level.