Entrusted Loans: A Close Look at China's Shadow Banking System

Allen, Franklin; Qian, Yiming; Tu, Guoqian; Yu, Frank

doi:10.2139/ssrn.2621330

Cited by 24 publications

(25 citation statements)

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“…Small and medium banks structured WMPs to ward off competition for retail deposits from big banks, whereas the latter use WMPs to refinance their local government loans (Acharya et al, 2016). 2 Some 'shadow' products -such as entrusted loans extended by cash-rich corporations to other corporations via banks -provide important sources of alternative financing, a market solution to credit shortage (Allen et al, 2016). Big non-financial corporations often tap subsidized bank credit and re-lend it to the private sector (Du et al, 2016).…”

Section: Dec Shadow Banking As 'Viable Credit Alternative'mentioning

confidence: 99%

“…It defines shadow banking as 'other financial intermediaries' that meet the needs of economic actors traditionally excluded by banks, such as small and medium enterprises (SMEs) (Acharya et al, 2013;Allen et al, 2016). Yet DEC regulators worry that this approach conflates well-regulated, non-bank financial institutions important to economic development with shadow banks posing systemic risks (FSB, 2014).…”

Section: Introductionmentioning

confidence: 99%

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Goodbye (Chinese) Shadow Banking, Hello Market‐based Finance

Gabor¹

2018

Development and Change

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Shadow 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.

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Section: Dec Shadow Banking As 'Viable Credit Alternative'mentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Goodbye (Chinese) Shadow Banking, Hello Market‐based Finance

Gabor¹

2018

Development and Change

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“…The rationale for such behavior is that information asymmetries are paramount in the shadow banking system, but these information asymmetries are likely to be less important for firms that operate in the same sector. Hence firms that lend through entrusted loans (or other shadow banking instruments) are more likely to fund firms that operate in similar sectors (or similar cities, for evidence see Allen et al (2017)). Consider now a situation in which firms in risky sectors face tighter domestic credit conditions, while some large firms that belong to risky sectors are unconstrained as they have access to the international capital market.…”

Section: Firm Heterogeneitymentioning

confidence: 99%

Corporate Foreign Bond Issuance and Interfirm Loans in China

Huang¹,

Panizza²,

Portes³

2018

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. AbstractThis paper uses firm-level data to document and analyze international bond issuance by Chinese non-financial corporations and the use of the proceeds of issuance. We find that dollar issuance is positively correlated with the differential between domestic and foreign interest rates. This interest rate differential increases the likelihood of dollar bond issuance by risky firms and decreases the likelihood of dollar bond issuance of exporters and profitable firms. Moreover, and most strikingly, we find that risky firms do more inter-firm lending than non-risky firms and that this lending rose significantly after the regulatory shock of 2008-09, when the authorities sought to restrict the financial activities of risky firms. Risky firms try to boost profitability by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation that limits risk-taking by financial firms.financial corporations played a key role in this surge in international bond issuances. 1 There are concerns that when advanced economies will start increasing interest rates, foreign currency debt could become a threat to financial stability in emerging market (EM) countries (Acharya and Steffen (2015); Alfaro, Asis, Chari, and Panizza (2017); Elekdag, Alter, Arregui, Ichiue, Khadarina, Kikkawa, Kumarapathy, Narita, and Zhang (2015)).China was a key player in this recent increase in bond issuance. International Bonds issued by Chinese nationals represented 3.5 percent of total outstanding international bonds issued by EM nationals in 2007 and are now more than 20 percent of the total (the dollar amount of outstanding bonds went from $20 billion in 2007 to $823 billion at the end of 2016). In 2007, total issuances of international bonds by Chinese nationals were 5 percent of total issuances by EM nationals, while in 2016 total issuances of international bonds by Chinese nationals were close to 40 percent of total issuances (the dollar value went from $3 billion to $237 billion).Outstanding international bonds issued by Chinese non-financial corporations increased from $9 billion in 2007 (3% of total outstanding international bonds issued by EM nationals nonfinancial corporations) to $534 billion in 2016 (65% of total outstanding international bonds issued by EM nationals non-financial corporations). The share of these bonds denominated in US dollars increased from 66 percent in 2007 to 85 percent in 2016. This paper uses bond-...

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“…For example, He, Lu, and Ongena (2015) investigate the reaction of stock prices of both issuing and receiving firms to an entrusted-loan announcement. Allen, Qian, Tu, and Yu (2015) explore which types of lending firms tend to make entrusted loans and their motives in making affiliated and non-affiliated entrusted loans. Qian and Li (2013) provide an analysis of entrusted lending as an alternative way of external funding to bank loans when the borrower and the lender have an affiliation relationship.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The annual report of a listed nonfinancial company may also contain information about entrusted loans, as used by Allen, Qian, Tu, and Yu (2015). The scope of our paper, however, compels us to use information contained in announcements of entrusted loans for several reasons.…”

mentioning

confidence: 99%

What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending

Chen¹,

Ren²,

Zha³

2016

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We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system. We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China.

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Entrusted Loans: A Close Look at China's Shadow Banking System

Cited by 24 publications

References 4 publications

Goodbye (Chinese) Shadow Banking, Hello Market‐based Finance

Goodbye (Chinese) Shadow Banking, Hello Market‐based Finance

Corporate Foreign Bond Issuance and Interfirm Loans in China

What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending

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