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Implicit guarantees and the rise of shadow banking: The case of trust products

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  • Allen, Franklin
  • Gu, Xian
  • Li, C. Wei
  • Qian, Jun “QJ”
  • Qian, Yiming

Abstract

Implicit guarantees provided by financial intermediaries are a key component of China's shadow banking sector. We show theoretically that project screening by intermediaries, accompanied by their implicit guarantees to investors, can be the second-best arrangement and mitigate capital misallocation that favors state-owned enterprises (SOEs). Using a dataset of trusts’ investment products, we find, consistent with our model, that ex ante expected yields reflect borrower risks and implicit guarantee strength, and risk sensitivity is reduced by strong guarantees. Regulations in 2018 restricting implicit guarantees lead to a weaker relationship between yield spread and guarantee strength, and more credit rationing of non-SOEs.

Suggested Citation

  • Allen, Franklin & Gu, Xian & Li, C. Wei & Qian, Jun “QJ” & Qian, Yiming, 2023. "Implicit guarantees and the rise of shadow banking: The case of trust products," Journal of Financial Economics, Elsevier, vol. 149(2), pages 115-141.
    • Handle: RePEc:eee:jfinec:v:149:y:2023:i:2:p:115-141
    DOI: 10.1016/j.jfineco.2023.04.012
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    5. Lei, Ningze & Huang, Liqiang, 2023. "Corporate financing from shadow banking and bond credit spreads," Finance Research Letters, Elsevier, vol. 58(PB).
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    7. Chao Yuan & Hai Jiang & Jiawen Ren & Nikos Kapitsinis, 2024. "Collateral Monetary Policy, Regional Financial Development, and Nonfi nancial Firms' Shadow Banking Activities," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(5), pages 166-196, September.
    8. Wan, Xiaoli & Margaritis, Dimitris, 2024. "Shadow banking and loan pricing of commercial banks: Evidence from China," Emerging Markets Review, Elsevier, vol. 60(C).
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    11. 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).

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    More about this item

    Keywords

    Shadow banking; Trust products; Implicit guarantee; Yield; Real estate; SOE;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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