Do China’s Shadow Banking Interest Rates Capture Its Monetary Policy Stance?

The alarming growth of China’s shadow banking since 2008 has significantly increased the difficulty of measuring and controlling monetary aggregates. Combined with the current economic slowdown and the transformation in the structure of the economy, the transition in China’s monetary policy framework is inevitable. It is interesting to see whether recent changes in monetary policy are reflected in the credit market. As the official liberalized retail interest rates are still unreliable and limited, we use the shadow banking interest rate as an alternative. We then aim to determine the extent to which market-based shadow banking interest rates can capture monetary policy intentions by estimating an EGARCH (exponential generalized autoregressive conditional heteroskedasticity) model. As the major participants in shadow banking are price-sensitive small- and medium-size enterprises, which contribute more to economic growth than price-insensitive state-owned enterprises, our results provide useful policy implications for future transition and conducting monetary policy.