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Shadow Deposits as a Source of Financial Instability: Lessons from the American Experience for China

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  • Nicholas Borst

    () (Peterson Institute for International Economics)

Abstract

In less than a decade, China has developed a shadow deposit system similar in scope and function to money market mutual funds in the United States. Wealth management products in China have emerged as an important source of short-term financing for the Chinese economy and are likely to continue to grow in coming years. These products promise savers higher interest rates than the controlled rates on traditional bank deposits but offer fewer investor protections. As such, these financing pools are vulnerable to rapid retrenchment when financial difficulty forces investors to reevaluate the risk of these investments. Consequently, a source of potential financial instability has been created in the Chinese economy. US experience in regulating shadow deposits offers useful lessons for China to guide its own financial development in a healthier direction.

Suggested Citation

  • Nicholas Borst, 2013. "Shadow Deposits as a Source of Financial Instability: Lessons from the American Experience for China," Policy Briefs PB13-14, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb13-14
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    References listed on IDEAS

    as
    1. David Luttrell & Harvey Rosenblum & Jackson Thies, 2012. "Understanding the risks inherent in shadow banking: a primer and practical lessons learned," Staff Papers, Federal Reserve Bank of Dallas, issue Nov.
    2. Raghuram G. Rajan & Rodney Ramcharan, 2016. "Constituencies and Legislation: The Fight Over the McFadden Act of 1927," Management Science, INFORMS, vol. 62(7), pages 1843-1859, July.
    3. Richard G. Anderson & Charles S. Gascon, 2009. "The commercial paper market, the Fed, and the 2007-2009 financial crisis," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 589-612.
    4. Michelle A. Clark, 1994. "Going interstate: a new dawn for U.S. banking," The Regional Economist, Federal Reserve Bank of St. Louis, issue Jul, pages 5-9.
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    Cited by:

    1. Torsten Ehlers & Steven Kong & Feng Zhu, 2018. "Mapping shadow banking in China: structure and dynamics," BIS Working Papers 701, Bank for International Settlements.
    2. Jinghan Cai & Alicia Garcia-Herrero & Le Xia, 2015. "China’s shadow banking sector: Arbitrage, window-dressing and wealth management products," Working Papers 1530, BBVA Bank, Economic Research Department.

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