This dissertation comprises three chapters representing a body of work examining the domestic and global implications of Chinese monetary policy. In order to better understand the conduct of Chinese monetary policy, this dissertation explores issues related to the proper identification of policy shocks, puzzles in the relationship between Chinese financial markets and monetary policy conduct, the role global supply chains play in the worldwide transmission of Chinese monetary policy shocks, and the role Chinese monetary policy plays in the creation of credit in both the traditional and shadow banking systems.
In the first chapter, published in the Journal of International Money and Finance (Shieh, 2024a), I answer the question: do Chinese monetary policy announcements matter? This chapter evaluates how relevant Chinese monetary policy announcements are to Chinese financial markets and the real side of the economy. The primary contribution of this chapter is developing an identified monetary policy shock measure. Chinese monetary policy is identified by estimating a ``target" factor measuring policy surprises and a ``path" factor measuring future expectations of policy using price changes to Chinese financial derivatives on policy announcement dates. Local projection results show a few key findings. First, Chinese Treasury yields and interbank rates respond persistently, suggesting that policy transmission through an interest-rate channel exists. Second, equities and exchange rates do not respond to policy announcements instantaneously but with a lag. Third, future expectations of Chinese monetary policy play a larger role than surprises. Fourth, real variables show evidence of policy transmission, and fifth, policy transmission may be sticky due to information frictions.
The second chapter, written jointly with Anirban Sanyal, explores whether or not Chinese monetary policy matters on a global stage. We characterize and evaluate how Chinese monetary policy shocks are transmitted globally by examining the role production linkages play in Chinese monetary policy shock transmission through global stock returns. Using a spatial autoregression with identified shocks, we explore how Chinese policy shocks propagate up and downstream through supply chains. Firms on both ends of the Chinese production network show negative country-industry level equity returns in response to a contractionary monetary policy shock. Notably, most of the observed equity responses to monetary policy shocks can be attributed to the network effect of firms being connected across global supply chains, highlighting China's role in supply chains. We attribute the heterogeneity in equity responses across countries and industries to a country's degree of home-bias by simulating a standard small-open economy model with supply chain integration. Our results highlight the importance supply chains play in the transmission of Chinese monetary policy.
In the third and final chapter, I examine the relationship between Chinese monetary policy and the Chinese shadow banking sector. More specifically, I evaluate the effect of Chinese monetary policy shocks on credit creation through the shadow banking sector in mainland China. I identify monetary policy shocks by constructing a measure of monetary policy surprises based on changes to the 1-Year Interest Rate Swaps on the 7-Day Repo Rate on monetary policy announcement dates. A two-stage local projection was then estimated using the surprise measure as an instrument. The results give two key findings. First, shadow credit expands in response to contractionary monetary policy and second, I provide additional evidence of the transmission of monetary policy through the interest rate channel.