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The varying shadow of China's banking system

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  • Zhu, Xiaodong

Abstract

The rapid rise of shadow banking activities in China since 2009 has attracted a great deal of attention in both academia and policy circles. Most existing studies and commentary on China's shadow banking have treated it as a recent phenomenon that appeared after the Global Financial Crisis and China's response to it. In this paper, I argue that shadow banking is not a new phenomenon; it has always been a part of China's financial system since the 1980s, and arose from the need to get around various lending restrictions imposed by the central government on banks. I also emphasize that there are two types of shadow banking activities, those initiated by banks and those initiated by local governments or state-owned enterprises. I provide evidence suggesting that the shadow banking activities initiated by banks prior to 1996 helped directing credits to the more productive non-state sector and were efficiency enhancing. In recent years, however, I find that the shadow banking loans have a positive effect on real estate investments only, and their effects on investments by private firms outside the real estate sector have been negative.

Suggested Citation

  • Zhu, Xiaodong, 2021. "The varying shadow of China's banking system," Journal of Comparative Economics, Elsevier, vol. 49(1), pages 135-146.
    • Handle: RePEc:eee:jcecon:v:49:y:2021:i:1:p:135-146
    DOI: 10.1016/j.jce.2020.07.006
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    References listed on IDEAS

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    1. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    2. Allen, Franklin & Qian, Yiming & Tu, Guoqian & Yu, Frank, 2019. "Entrusted loans: A close look at China's shadow banking system," Journal of Financial Economics, Elsevier, vol. 133(1), pages 18-41.
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    8. Zheng Song & Kinda Hachem, 2015. "The Rise of China's Shadow Banking System," 2015 Meeting Papers 931, Society for Economic Dynamics.
    9. Yi Huang & Marco Pagano & Ugo Panizza, 2016. "Public Debt and Private Firm Funding: Evidence from Chinese Cities," IHEID Working Papers 10-2016, Economics Section, The Graduate Institute of International Studies, revised Aug 2016.
    10. Chong-En Bai & Chang-Tai Hsieh & Zheng (Michael) Song, 2016. "The Long Shadow of China’s Fiscal Expansion," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 129-181.
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    Cited by:

    1. Sarah Goldman & Virginia Zhelyazkova, 2023. "Drivers of Shadow Banking System: A Panel Empirical Approach for Developed Countries," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 8, pages 95-122.
    2. Jiang, Chun & Chang, Ya-Qi & Ge, Xinyu & Si, Deng-Kui, 2023. "Identifying the impact of bank competition on corporate shadow banking: Evidence from China," Economic Modelling, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    banking system; credit allocation; investment allocation; shadow banking; China;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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