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Shadow Banking in China: Implications for Financial Stability and Macroeconomic Rebalancing

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  • Yan Liang

Abstract

Shadow banks have grown exponentially in China since 2008 and their impacts on financial stability and real economic growth are highly controversial. This article analyzes the trend, operations, and causes of the surge in shadow banking institutions and activities. In addition, the article investigates the financial and “real” impacts of the shadow banks. Regarding financial impacts, the article discusses the potential risks at the institutional and systemic levels. Given the interconnectedness between shadow banks and the formal banking sector, risks in the shadow banks can easily be transmitted to the major commercial banks. On the one hand, albeit the potential risks, the article finds that the Chinese banking sector is unlikely to encounter a crisis, given the current structure of the Chinese banking system and regulatory framework. On the other hand, despite much lauded “contributions” of shadow banks to the real economy, especially small- and medium-sized enterprises, the article argues that the benefits of shadow banks in financing real productive activities are highly limited.

Suggested Citation

  • Yan Liang, 2016. "Shadow Banking in China: Implications for Financial Stability and Macroeconomic Rebalancing," Chinese Economy, Taylor & Francis Journals, vol. 49(3), pages 148-160, May.
    • Handle: RePEc:mes:chinec:v:49:y:2016:i:3:p:148-160
    DOI: 10.1080/10971475.2016.1159903
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    Cited by:

    1. Ma, Yongfan & Hu, Xingcun, 2024. "Shadow banking and SME investment: Evidence from China's new asset management regulations," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 332-349.
    2. Isayev, Mugabil & Gokmenoglu, Korhan, 2024. "The role of shadow banking towards a sustainable growth path," Renewable Energy, Elsevier, vol. 228(C).
    3. Islam, Raisul & Volkov, Vladimir, 2020. "Contagion or interdependence? Comparing signed and unsigned spillovers," Working Papers 2020-05, University of Tasmania, Tasmanian School of Business and Economics.
    4. Philip Arestis & Maggie Mo Jia, 2019. "Credit risk and macroeconomic stress tests in China," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(3), pages 211-225, September.
    5. Alexey Vasilenko, 2018. "Systemic Risk and Financial Fragility in the Chinese Economy: A Dynamic Factor Model Approach," Bank of Russia Working Paper Series wps30, Bank of Russia.
    6. Raisul Islam & Vladimir Volkov, 2022. "Contagion or interdependence? Comparing spillover indices," Empirical Economics, Springer, vol. 63(3), pages 1403-1455, September.

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