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The Varying Shadow of China's Banking System

Xiaodong Zhu ()

Working Papers from University of Toronto, Department of Economics

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 tend to be efficiency enhancing, but those initiated by local governments and state-owned enterprises are more likely to be associated with misallocation of capital. The policy implication is that the central government should implement policies and regulations that break the link between financial institutions and local governments or state-owned enterprises.

Keywords: China; Banking System; Shadow Banking; Capital Allocation (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 E44 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cna, nep-mac and nep-tra
Date: 2018-05-17
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