Neglected Part of Shadow Banking in China

Abstract

Guaranteed off-balance sheet (consists of banker’s acceptance, letter of credit and letter of guarantee), is an essential part of China’s shadow banking, but neglected by current research because no data available. This paper fills the research gap, by investigate the mechanism behinds its cyclical behavior through a novel dataset. Different from developed economies, guaranteed off-balance sheet in China has long-run substitute relation with commercial loan. Therefore, any policy impacts on commercial loan growth will has a converse effect on guaranteed off-balance sheet growth indirectly. Furthermore, contrary to existing research about China’s shadow banking, we find the Desirability Lending Policy conducted by People’s Bank of China during 2011-2014 is the unique fundamental driving force, rather than traditional regulatory constraints, such as reserve requirement ratio and loan-to-deposit ratio. It’s an example of macroprudential policy induces shadow banking activity. Moreover, guaranteed off-balance sheet growth is also influenced by macroeconomy, risk and return factors of itself, operation efficiency and creditworthiness of the bank. Hence empirical results of this paper could also be viewed as the first time to test off-balance sheet development theories with China’s data.