Concluding remarks
China’s monetary policy is still transitioning to a more market-oriented form. Monetary policy is an important tool that not only affects the development of the economy at the macro level, but also has a significant impact on the micro-economic environments in which enterprises make decisions. Under the reform and opening-up policy, China’s economy has maintained continuous high-speed growth, but a non-market economic system still exists and the government still directly influences enterprises’ decisions. First, we investigate how the institutional environment moderates the effect of monetary policy on enterprise investment. We identify the mechanism that transmits China’s macro monetary policy to investment decisions at the micro level. Tightening monetary policy significantly reduces business investment, whereas loosening monetary policy increases business investment. However, this effect varies between local governments due to different institutional environments, economic growth targets and degrees of economic control. In areas where local government intervention is high, business investment is significantly higher than otherwise. We find that monetary policy has a more effective regulatory impact on enterprises owned directly by the central government than on SOEs managed by local governments, as the central government SOEs are managed independent of the local governments and are less subject to interferences that tend to weaken and distort the effects of the monetary policy. This is particularly the case when the direction of monetary policy is not consistent with the local government’s economic objectives; when the local government’s intervention is strong, the effects of monetary policy on the investment decisions of local enterprises is more distorted.
