Corporate Inventory Adjustment and the Effectiveness of Fiscal Policy in China

Abstract

For many years, China has been very much conservative in fiscal expansion. In this paper, we analyze the impact of economic policy uncertainty on the adjustment of corporate inventory holdings, as well as its intrinsic mechanism and economic consequences. The empirical results show that the increase in policy uncertainty has a significant and negative effect on the level of corporate inventories, and non-SOEs are affected more than SOEs. In addition, we find that the larger the financial constraints or the better the external governance, the greater the inhibitory effect of policy uncertain on inventory investment. In summary, policy uncertainty may lead to an increase in corporate cash holdings and a reduction in inventories through the deterioration of the financing environment and the increase of business risk. The main issues are examined with a view to providing policy recommendations that would allow to maintain robust growth in a sustainable manner.