Abstract
In this paper, we provide a qualitative and theoretical framework to analyze the rapid growth of shadow banking in China. An important characteristic of the system is its close connection with traditional banks, making it very bank-centric. Our theoretical model employs the concept of “information sensitivity” – a measure of tail risks – by Dang, Gorton and Holmstrom (2013) and suggests that Chinese shadow banking is built on the asymmetric perception of information sensitivity among shadow banking entities, banks and investors. Compared to the US, we show that shadow banking in China is built on different mechanisms (implicit guarantees in China versus financial engineering in the US) and operates on different platforms (banks versus capital markets).
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