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‘One System, Two Shadows’: A local public finance perspective on China's shadow banking system

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  • Zhang, Shidai
  • Tsai, Kellee S.

Abstract

Why does shadow banking persist in China despite repeated policy efforts to contain it? While studies of informal finance have traditionally emphasized the credit needs of private businesses as a demand-side explanation, this study contends that China's local public finance also constitutes an important driver for shadow banking. Based on document research and administrative data, we find that China's shadow banking system has bifurcated into two segments since the Global Financial Crisis (GFC). One is the ‘entrepreneurial shadow’ that has long provided informal credit to the private sector, especially small- and medium-sized enterprises. The other is a ‘fiscal shadow’, which serves property developers and local government financing vehicles (LGFVs), the two pillars of China's land-based local public finance regime. Property developers are major contributors to local fiscal revenues through the land economy, while LGFVs function as off-balance sheet backdoor financing intermediaries for local governments.

Suggested Citation

  • Zhang, Shidai & Tsai, Kellee S., 2024. "‘One System, Two Shadows’: A local public finance perspective on China's shadow banking system," China Economic Review, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:chieco:v:87:y:2024:i:c:s1043951x24000981
    DOI: 10.1016/j.chieco.2024.102209
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    Keywords

    China; Shadow banking; Public finance; Local government debt; Property developers;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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