How do economic policy uncertainty and inflation individually and collectively influence bank loan pricing decisions in China?

Abstract

Purpose: This study aims to examine how economic policy uncertainty (EPU) and inflation affect bank loan pricing decisions both individually and jointly in China. Design/methodology/approach: Panel regressions are used on data from Chinese banks spanning 2005–2022. Findings: The analysis reveals that both local and global EPU negatively affect bank loan pricing, while inflation exerts a positive impact. Moreover, higher inflation mitigates the negative impact of EPU on loan pricing, whereas increased EPU amplifies inflation’s effect on loan prices. These findings hold when the data are segmented into two bank groups: the Big Four and joint-stock commercial banks and city commercial banks. Originality/value: To the best of the authors’ knowledge, this study is the first to examine how EPU and inflation, both individually and together, influence loan pricing in China. The findings provide insights into how monetary policies (which affect inflation) and economic policies (which shape EPU) interact to shape loan pricing in China’s state-driven banking system. These insights can help banks refine their loan pricing and risk management strategies, assist investors and borrowers in making informed decisions and guide policymakers in balancing socioeconomic stability with financial stability during uncertain and inflationary periods. Ultimately, this can help mitigate negative impacts on the banking sector and the broader economy.