Preliminary draft December 2012 Monetary Policy and Bank lending in China -Evidence from loan level data Dong he and honglin wang Research Department Hong Kong Monetary Authority Abstract Monetary policy in China is conducted within a framework of dual-track interest rates and a juxtaposition of both price- and quantity-based policy instruments. In this paper we investigate how monetary policy affects bank lending using a newly constructed loan- level dataset. We develop a stylized model to illustrate how banks change the price and quantity of their loans when the central bank changes its monetary policy instruments Bank lending is affected not only by the regulated benchmark interest rates and reserve requirement ratiOs(RRR), but also by market-determined interest rates. The empirical findings are consistent with theoretical predictions. We also show that the impact of monetary policy instruments would be asymmetrical: loans to large firms are more sensitive to price-based instruments, while loans to small firms are more sensitive to quantity-based instruments. Quantity-based instruments are found to be more effective when monetary policy stance is being tightened; and in contrast price-based instruments are more effective when monetary policy stance is being loosened JEL classification: E52, E58, G21, G34 Keywords: Monetary policy, Bank lending, People's Bank of China Authors email address: dhe@hkma. gov hk; hwang@hkma. gov. hk The views and analysis in this paper are those of the authors and do not necessarily represent the views of the Hong Kong Monetary Authority We are very grateful to Fangzhou Liu, Yu Wang, Wenqi Liu, Gan Pan and Michael Dai for collecting data and excellent research assistance1 Preliminary draft December 2012 Monetary Policy and Bank Lending in China1 —Evidence from loan level data Dong He and Honglin Wang Research Department Hong Kong Monetary Authority Abstract Monetary policy in China is conducted within a framework of dual-track interest rates and a juxtaposition of both price- and quantity-based policy instruments. In this paper we investigate how monetary policy affects bank lending using a newly constructed loan￾level dataset. We develop a stylized model to illustrate how banks change the price and quantity of their loans when the central bank changes its monetary policy instruments: Bank lending is affected not only by the regulated benchmark interest rates and reserve requirement ratios (RRR), but also by market-determined interest rates. The empirical findings are consistent with theoretical predictions. We also show that the impact of monetary policy instruments would be asymmetrical: loans to large firms are more sensitive to price-based instruments, while loans to small firms are more sensitive to quantity-based instruments. Quantity-based instruments are found to be more effective when monetary policy stance is being tightened; and in contrast price-based instruments are more effective when monetary policy stance is being loosened. JEL classification: E52, E58, G21, G34 Keywords: Monetary policy, Bank lending, People’s Bank of China Author’s email address: dhe@hkma.gov.hk; hwang@hkma.gov.hk 1 We are very grateful to Fangzhou Liu, Yu Wang, Wenqi Liu, Gan Pan and Michael Dai for collecting data and excellent research assistance. The views and analysis in this paper are those of the authors and do not necessarily represent the views of the Hong Kong Monetary Authority