Goodbye (Chinese) Shadow Banking, Hello Market‐based Finance

Abstract

Shadow banking in developing and emerging countries (DECs) oscillates between two semantic poles. One definition is typically deployed by scholars for the narrow analysis of non‐bank financial intermediation as a viable alternative to banking. The other, more recent, definition circulates in the policy world to capture a new agenda of engineering (securities) market‐based finance. This article argues that this second definition captures the essential but neglected aspect of shadow banking in DECs. The ‘shadow banking into market‐based finance’ narrative reaffirms the celebratory tone of the financial globalization cum liberalization thesis dominant before the global financial crisis. It seeks to depoliticize contentious debates about capital flows and the constraints that financialized globalization poses to development, instead asking DECs to encourage portfolio flows, relax the regulatory grip on shadow funding markets and tap into the growing global demand for securities that marks the new age of asset management. China illustrates this argument well. In joining the global push for market‐based finance with the ambition to further its RMB internationalization agenda, China underestimates the (Minsky‐type) fragilities involved.

Critical macro-finance: A theoretical lens

“…(Shadow) banks find new ways to monetize credit and escape the constraints of state-backed money (Kindleberger, 1978). New systemic liabilities accommodate the structural needs of financial systems with hierarchical balance sheets populated by various global financial institutions, including institutional investors, asset managers, shadow banks, and market-based regulated banks (Gabor, 2018).…”

Central banking, shadow banking, and infrastructural power

“…The Chinese state in particular has used the financial system to project power and to accelerate economic development (Gruin, 2013, Wang, 2015. And while concerns over the sustainability of the growth of shadow money in China have grown, the government has been hesitant to reign in the shadow banking sector (Gabor, 2018). Disentangling finance and the state, and thus curbing the infrastructural power of the former is not, it appears, on the agenda of the Communist Party.…”

“…While the quote illustrates that technocrats were aware of this central bank-finance nexus, the tranquillity of the 'Great Moderation' -a two-decade period starting in the late 1980 characterized by low inflation and stable growth rates -was such that (political) economists largely ignored this nexus. Crucially, however, this period of calm and institutionalized central bank dominance coincided with the transformation of traditional banking into "securitized" (Gorton and Metrick, 2012) or "market-based" banking (Hardie andHowarth, 2013, Hardie et al, 2013), and with the growth of the broader shadow banking system (Gabor, 2018, Lysandrou and Nesvetailova, 2015, Thiemann, 2018. The hallmark of that system is the securitization of both sides of banks' balance sheets -market-based funding via the repo market on the liability side and market-based lending via asset-backed securities (ABSs) on the asset side.…”

Governing through financial markets: Towards a critical political economy of Capital Markets Union

“…In addition, Brexit and the new politics of the Franco-German engine appear to put on the table a European finance minister, potentially replenishing the macroeconomic toolkit, with uncertain consequences for the ‘governing through financial markets’ strategy (Bénassy-Quéré et al, 2018). Finally, the CMU project should not be understood in isolation as the outcome of distinctively European political pathologies, but as part of a global re-organization of finance around securities and derivative markets, which has now reached China (Gabor, 2018). What is at stake for European polities in a world where Chinese finance becomes a significant contender, alongside the US?…”