Abstract
China’s shadow banking has been rising rapidly in the last decade, mainly driven by regulations for banks, the Fiscal Stimulus Plan in 2008, and credit constraints in restrictive industries. This sector has continued growing although the regulators repeatedly attempted to impose new regulations on banks and non-banks. The existence of shadow banking fulfills the high demand for funding. The standard view is that it poses risks to financial stability. However, in China this is not necessarily the case. Entrusted loans, implicit guarantees from non-banks, banks or government may provide a second-best arrangement in funding risky projects and improving welfare.
Highlights
China's shadow banking has been growing significantly in the last decade
This paper aims to discuss the emergence, growth and components of China's shadow banking, provide a comparison with the counterparts in the United States, the United Kingdom and Europe and review the recent literature
In China, the activities component of shadow banking includes the issuance by a variety of institutions of wealth management products (WMPs), asset management products (AMPs), entrusted loans, trust loans, undiscounted bankers’ acceptance, finance company loans, microcredit by, peer-to-peer (P2P) lending and informal lending
Summary
China's shadow banking has been growing significantly in the last decade. The increasing sophistication of the financial system can be both a blessing and a curse. The literature on China's shadow banking has been actively growing in recent years. Allen, Qian, and Qian (2005) argue that an alternative financial sector including informal financing, built on trust, relationship and reputation, has played an important role in supporting the growth of a private sector that has been growing much faster than both the state sector and the listed sector. In addition to informal financing, nonbank financial institutions and shadow banking have provided significant financing for growth for this sector. In China, the activities component of shadow banking includes the issuance by a variety of institutions of wealth management products (WMPs), asset management products (AMPs), entrusted loans, trust loans, undiscounted bankers’ acceptance, finance company loans, microcredit by, peer-to-peer (P2P) lending and informal lending. The reasons behind the fast growth include liquidity regulation, the Stimulus Plan launched in 2008, as well as credit constraints in certain industries. Hachem and Song (2017) document that one of the main causes of Chinese shadow banking growth was regulatory arbitrage of liquidity rules, in
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