Abstract
ABSTRACTShadow banking in developing and emerging countries (DECs) oscillates between two semantic poles. One definition is typically deployed by scholars for the narrow analysis of non‐bank financial intermediation as a viable alternative to banking. The other, more recent, definition circulates in the policy world to capture a new agenda of engineering (securities) market‐based finance. This article argues that this second definition captures the essential but neglected aspect of shadow banking in DECs. The ‘shadow banking into market‐based finance’ narrative reaffirms the celebratory tone of the financial globalization cum liberalization thesis dominant before the global financial crisis. It seeks to depoliticize contentious debates about capital flows and the constraints that financialized globalization poses to development, instead asking DECs to encourage portfolio flows, relax the regulatory grip on shadow funding markets and tap into the growing global demand for securities that marks the new age of asset management. China illustrates this argument well. In joining the global push for market‐based finance with the ambition to further its RMB internationalization agenda, China underestimates the (Minsky‐type) fragilities involved.
Highlights
Shadow banking in developing and emerging countries (DECs) oscillates between two semantic poles
The shadow banking reform agenda in DEC countries has undergone fundamental changes. It started as a project of understanding, regulating – and for DEC regulators protecting – alternative sources of credit that are socially useful given the credit rationing exercised by the formal banking sector
It has morphed into a project of transforming DEC financial systems into market-based finance, of policy engineering the production and wholesale funding of tradable securities
Summary
‘in order to successfully internationalise the RMB [...] China will have to build deep and liquid financial markets open to the rest of the world’ (Eichengreen 2015 p1). This policy-engineered financial globalisation seeks a clean break from ‘policy-engineered industrialisation’ in DEC countries that involved capital controls, bank credit guided by the priorities of industrial strategies and competitive exchange rate management (Storm 2017) It seeks to accelerate the global diffusion of the architecture of the US securities and securities funding markets, with its well-documented fragilities (FSB 2012, 2013, Tarullo 2015, Gabor 2016) and contested social efficiency (see Epstein this issue), in order to support business models predicated on daily volatility in the market price of securities. Only the outright segment of the Chinese repo market fits the legal definition of a repo that guides the FSB shadow banking regulatory framework
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