China’s shadow banking sector: beneficial or harmful to economic growth?

Abstract

Purpose – The purpose of this paper is to examine recent developments pertaining to China’s shadow banking sector. Shadow banking has the potential not only to be a beneficial contributor to continued economic growth, but also to contribute to systematic instability if not properly monitored and regulated. An assessment is made in this paper as to whether shadow banking is beneficial or harmful to China’s economic growth. Design/methodology/approach – The authors start with providing an overview of shadow banking from a global perspective, with information on its recent growth and importance in selected countries. The authors then focus directly on China’s shadow banking sector, with information on the various entities and activities that comprise the sector. Specifically, the authors examine the interconnections between shadow banking and regular banking in China and the growth in shadow banking to overall economic growth, the growth in the money supply and the growth in commercial bank assets. Findings – Despite the wide range in the estimates, the trend in the size of shadow banking in China has been upward over the examined period. There are significant interconnections between the shadow banking sector and the commercial banking sector. Low deposit rate and high reserve requirement ratios have been the major factors driving its growth. Shadow banking has been a contributor, along with money growth, to economic growth. Practical implications – The authors argue that shadow banking may prove useful by diversifying China’s financial sector and providing greater investments and savings opportunities to consumers and businesses throughout the country, if the risks of shadow banking are adequately monitored and controlled. Originality/value – To the authors’ knowledge, this paper is among the few to systematically evaluate the influence of shadow banking on China’s economic growth.

Shadow banking: a bibliometric and content analysis

“…The growth of SB and the inconclusiveness of the debate on SB prospects make studies addressing its implications on financial stability crucial. Some of the studies addressing such implications focused on specific components of SB (e.g., Culp 2013;Bengtsson 2013), and others addressed the overall SB sector (e.g., Barth et al 2015;Liang 2016a, Tsai 2016Zhou and Tewari 2019a, b;Ilesanmi and Tewari 2019). Bengtsson (2013) conducted a study on the European economy and reported that there is a lack of transparency regarding the composition of Money Market Fund (MMFs) assets making it difficult for European MMF investors to distinguish between MMFs based on their asset quality.…”

“…Nevertheless, Huang (2018) presented SB as the off-balance-sheet financing of traditional banks and reported that a limited level of risk-sharing does not improve financial stability. Barth et al (2015) conducted a study on the Chinese economy and stated that if the Chinese SB system encounters difficulties, such difficulties may also affect China's commercial banks. However, China's regulatory body has developed several policies for governing SB operations and the interconnectedness of SBs and commercial banks.…”

Shadow credit in the middle market: the decade after the financial collapse

“…Studies of China’s banking sector largely conclude that its domestic SCM mirrors the US and European banking practices and opaque lending structures outside regulatory control in the pre-2007 period and, thus, significant downside risk that may destabilize the global economy ( The Economist , 2006, 2014, 2016a, 2016b, 2016c; Barth et al , 2015; Li et al , 2014; Li, 2014; Lu et al , 2014).…”

“…Money market funds ‫)8س(‬ hav‫؟‬ attracted considerable attention because of retail investor participation (Chernenko and Sunderam, 2014;Cipriani et al, 2013). Bengtsson (2016) Studies of China's banking sector largely conclude that its domestic SCM mirrors the US and European banking practices and opaque lending srtuctures outside regulatory control in the pre-2007 period and, thus, si^ificant downside risk that may destabilize the global economy {The Economist, 2^6, 2014Economist, 2^6, , 2016aEconomist, 2^6, , 2016bEconomist, 2^6, , 2016cBarth et al, 2015;Li et al, 2014;Li, 2014;Lu ‫(ة‬ ß¿, 2014).…”

Banking in the Shadows: A Comparative Study of China and India

“…According to the Circular 107 issued by the Chinese government, shadow banking is defined as "credit intermediation entities and activities outside the traditional banking system"(Huang 2015). This definition, however, does not take into account the different risks and vulnerabilities attached to shadow banking such as the interconnectedness between formal banking system and shadow banks(Barth et al 2015, Lu et al 2015.…”