Shadow Banking in China

Abstract

Shadow banking and the Chinese economy are two subjects that have independently garnered much attention. A new but actively growing literature is now emerging at their intersection. I review this literature and argue that shadow banking in China is not fundamentally different from the textbook definition of shadow banking, namely credit intermediation with maturity mismatch that is structured to avoid regulation. I emphasize maturity mismatch because that is what creates run risk and makes any shadow banking system inherently fragile. I explain how the rise of shadow banking in China can be traced back to stricter liquidity regulation, how shadow banking has changed the financial landscape in China, and what the current state of the industry is. Interactions between shadow banking and the rest of the economy have some characteristics that reflect China's unique politico-economic structure, but this is because the rest of the economy has these characteristics, not because there is something fundamentally different about the forces behind shadow banking in China.

The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes

“…However, local governments are still heavily involved in bankruptcy resolutions, because many defaulting enterprises have strong ties to local governments. 3 The literature typically classifies trust loans (Allen et al (2017)), entrusted loans (Allen et al (2018); Chen et al (2018b); He et al (2018)), and undiscounted bank acceptance bills (An and Yu (2018)) as shadow banking actitivies as surveyed by Hachem (2018). WMPs are widely referred to as shadow banking activities, but they are not the ultimate users of funds (e.g., WMPs can be invested in trust loans).…”

Liquidity Rules and Credit Booms

“…We show that large banks choose more liquid positions than small banks in an equilibrium model with endogenous interbank pricing, which is consistent with large banks in China being less constrained by liquidity requirements than small banks. See Hachem (2018) for further discussion, including a comparison between shadow banking in the U.S. and China.…”

“…Finally, our quantitative application is related to a rapidly growing literature on China's …nancial system. See Hachem (2018) and Song and Xiong (2018) for surveys. Chen, Ren, and Zha (2018) argue that an additional form of shadow banking emerged in China as an unintended consequence of contractionary monetary policy.…”

“…The increasing frequency of CBRC's loan-to-deposit enforcement was also complemented by a rapid increase in the reserve requirements set by the central bank. We refer the reader to Hachem (2018) and Song and Xiong (2018) for more on China's regulatory environment and …nancial institutions.…”

“…First, banks whose loan-to-deposit ratios are materially lower at the end of the year than on an average day during the year are window-dressing their year-end balance sheets. Hachem (2018) discusses the practices used in China before 2008 and why these practices could not be used to window-dress average balance ratios. Second, Figure F.1 shows that the loan-to-deposit ratio of the Big Four has increased towards 75% since the beginning of the enforcement.…”