Do Chinese firms speculate during high economic policy uncertainty? Evidence from wealth management products

It has been well-documented that policy-related uncertainty has significant economic consequences. Studies show that US firms tend to delay investments and be conservative during periods of high economic policy uncertainty (EPU), but findings regarding Chinese firms suggest that they seem to act speculatively. This study examines the impact of policy uncertainty on firms' bank wealth management product (WMP) purchasing and helps better understand firm behaviour during high EPU. Using Chinese listed firms' bank WMPs purchasing data, we find that high EPU is associated with a higher probability of bank WMPs being purchased. Moreover, a 100% increase in EPU is associated with an 11.14% increase in average bank WMP holdings in the sample. We provide evidence that Chinese firms are not speculative, but prudent, and use bank WMP holdings to hedge the risk of policy uncertainty. Additionally, we show that financial constraints are the channels through which EPU affects bank WMP holdings.