1932

Abstract

Shadow banking and the Chinese economy are two subjects that have independently garnered much attention. A new but actively growing literature is now emerging at their intersection. I review this literature and argue that shadow banking in China is not fundamentally different from the textbook definition of shadow banking, namely credit intermediation with maturity mismatch that is structured to avoid regulation. I emphasize maturity mismatch because that is what creates run risk and makes any shadow banking system inherently fragile. I explain how the rise of shadow banking in China can be traced back to stricter liquidity regulation, how shadow banking has changed the financial landscape in China, and what the current state of the industry is. Interactions between shadow banking and the rest of the economy have some characteristics that reflect China's unique politico-economic structure, but this is because the rest of the economy has these characteristics, not because there is something fundamentally different about the forces behind shadow banking in China.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-financial-110217-023025
2018-11-01
2025-04-21
Loading full text...

Full text loading...

/deliver/fulltext/financial/10/1/annurev-financial-110217-023025.html?itemId=/content/journals/10.1146/annurev-financial-110217-023025&mimeType=html&fmt=ahah

Literature Cited

  1. Acharya V, Qian J, Yang Z 2017. In the shadow of banks: wealth management products and issuing banks’ risk in China Work. Pap. Stern Sch. Bus., N.Y. Univ. New York:
    [Google Scholar]
  2. Acharya V, Richardson M 2009. Causes of the financial crisis. Crit. Rev. 21:2–3195–210
    [Google Scholar]
  3. Acharya V, Schnabl P, Suarez G 2013. Securitization without risk transfer. J. Financ. Econ. 107:3515–36
    [Google Scholar]
  4. Agarwal S, Lucca D, Seru A, Trebbi F 2014. Inconsistent regulators: evidence from banking. Q. J. Econ. 129:2889–938
    [Google Scholar]
  5. Allen F, Gu X, Qian J, Qian Y 2017. Implicit guarantee and shadow banking: the case of trust products Work. Pap. Imp. Coll. Lond. London:
    [Google Scholar]
  6. Allen F, Qian Y, Tu G, Yu F 2016. Entrusted loans: a close look at China's shadow banking system Work. Pap. Imp. Coll. Lond. London:
    [Google Scholar]
  7. An P, Yu M 2018. Neglected part of shadow banking in China. Int. Rev. Econ. Finance. In press. https://doi.org/10.1016/j.iref.2018.01.005
    [Crossref] [Google Scholar]
  8. Ang A, Bai J, Zhou H 2016. The great wall of debt: real estate, political risk, and Chinese local government credit spreads Work. Pap. Columbia Bus. Sch., Columbia Univ. New York:
    [Google Scholar]
  9. Bai C, Hsieh C, Song Z 2016. The long shadow of a fiscal expansion. Brookings Pap. Econ. Act. Fall:129–81
    [Google Scholar]
  10. Bai J, Krishnamurthy A, Weymuller C 2016. Measuring liquidity mismatch in the banking sector. J. Finance 73:151–93
    [Google Scholar]
  11. Bernanke B 1983. Nonmonetary effects of the financial crisis in the propagation of the Great Depression. Am. Econ. Rev. 73:3257–76
    [Google Scholar]
  12. Bernanke B 2009. The crisis and the policy response Stamp Lect., Lond. Sch. Econ. London:
    [Google Scholar]
  13. Bernard V, Kormendi R, Pirrong S, Snyder E 1989. The origins and resolution of the thrift crisis. J. Appl. Corp. Finance 2:385–99
    [Google Scholar]
  14. Berrospide J 2013. Bank liquidity hoarding and the financial crisis: an empirical evaluation Work. Pap. 2013-03 Finance Econ. Discuss. Ser., Board Gov. Fed. Reserve Syst. Washington, DC:
    [Google Scholar]
  15. Boyson N, Fahlenbrach R, Stulz R 2016. Why don't all banks practice regulatory arbitrage? Evidence from usage of trust-preferred securities. Rev. Financ. Stud. 29:71821–59
    [Google Scholar]
  16. Brunnermeier M 2009. Deciphering the liquidity and credit crunch 2007–2008. J. Econ. Perspect. 23:177–100
    [Google Scholar]
  17. Brunnermeier M, Gorton G, Krishnamurthy A 2012. Liquidity mismatch measurement. Risk Topography: Systemic Risk and Macro Modeling M Brunnermeier, A Krishnamurthy 99–112 Cambridge, MA: NBER
    [Google Scholar]
  18. Cavalcanti R 2010. Inside-money theory after Diamond and Dybvig. Fed. Reserve Bank Richmond Econ. Q. 96:159–82
    [Google Scholar]
  19. Chen K, Ren J, Zha T 2017. The nexus of monetary policy and shadow banking in China NBER Work. Pap 23377
    [Google Scholar]
  20. Chen Z, He Z, Liu C 2017. The financing of local government in China: Stimulus loan wanes and shadow banking waxes NBER Work. Pap 23598
    [Google Scholar]
  21. Cohen J, Hachem K, Richardson G 2017. Relationship lending and the Great Depression NBER Work. Pap 22891
    [Google Scholar]
  22. Covitz D, Liang N, Suarez G 2013. The evolution of a financial crisis: collapse of the asset-backed commercial paper market. J. Finance 68:3815–48
    [Google Scholar]
  23. Cull R, Xu L, Zhu T 2009. Formal finance and trade credit during China's transition. J. Financ. Intermed. 18:2173–92
    [Google Scholar]
  24. Dang T, Wang H, Yao A 2015. Shadow banking modes: the Chinese versus US system Work. Pap. Dep. Econ., Columbia Univ. New York:
    [Google Scholar]
  25. Dávila E, Walther A 2017. Does size matter? Bailouts with large and small banks NBER Work. Pap 24132
    [Google Scholar]
  26. Demyanyk Y, Loutskina E 2016. Mortgage companies and regulatory arbitrage. J. Financ. Econ. 122:2328–51
    [Google Scholar]
  27. Diamond D, Dybvig P 1983. Bank runs, deposit insurance, and liquidity. J. Polit. Econ. 91:3401–19
    [Google Scholar]
  28. Du J, Li C, Wang Y 2016. Shadow banking activities in non-financial firms: evidence from China Work. Pap. Dep. Econ., Chin. Univ Hong Kong, Hong Kong:
    [Google Scholar]
  29. Elliott D, Kroeber A, Qiao Y 2015. Shadow banking in China: a primer Econ. Stud., Brookings Inst. Washington, DC:
    [Google Scholar]
  30. Fabbri D, Klapper L 2008. Market power and the matching of trade credit terms Policy Res. Work. Pap. 4754 World Bank Washington, DC:
    [Google Scholar]
  31. Friedman M, Schwartz A 1963. A Monetary History of the United States, 1867–1960 Princeton, NJ: Princeton Univ. Press
    [Google Scholar]
  32. Gao H, Ru H, Tang D 2017. Subnational debt of China: the politics-finance nexus Work. Pap. Cent. Univ. Finance Econ. Beijing:
    [Google Scholar]
  33. Gatev E, Strahan P 2006. Banks’ advantage in hedging liquidity risk: theory and evidence from the commercial paper market. J. Finance 61:2867–92
    [Google Scholar]
  34. Goldstein I, Pauzner A 2005. Demand-deposit contracts and the probability of bank runs. J. Finance 60:31293–327
    [Google Scholar]
  35. Gorton G 2010. Slapped by the Invisible Hand: The Panic of 2007 Oxford, UK: Oxford Univ. Press
    [Google Scholar]
  36. Gorton G, Metrick A 2012. Securitized banking and the run on repo. J. Financ. Econ. 104:3425–51
    [Google Scholar]
  37. Gorton G, Pennacchi G 1990. Financial intermediaries and liquidity creation. J. Finance 45:149–71
    [Google Scholar]
  38. Hachem K, Song Z 2015. The rise of China's shadow banking system Unpublished manuscript
    [Google Scholar]
  39. Hachem K, Song Z 2017. Liquidity rules and credit booms Work. Pap. Booth Sch. Bus., Univ. Chic. Chicago:
    [Google Scholar]
  40. Hachem K, Song Z 2018. Intermediated misallocation or misallocated intermediaries? Unpublished manuscript
    [Google Scholar]
  41. Hanson S, Shleifer A, Stein J, Vishny R 2015. Banks as patient fixed-income investors. J. Financ. Econ. 117:3449–69
    [Google Scholar]
  42. He Q, Lu L, Ongena S 2016. Who gains from credit granted between firms? Evidence from inter-corporate loan announcements made in China Work. Pap. Sch. Finance, Renmin Univ. China Beijing:
    [Google Scholar]
  43. Huang Y, Pagano M, Panizza U 2017. Local crowding out in China Work. Pap. Grad. Inst. Int. Dev. Stud. Geneva:
    [Google Scholar]
  44. Kacperczyk M, Schnabl P 2013. How safe are money market funds. Q. J. Econ. 128:31073–122
    [Google Scholar]
  45. Kashyap A, Rajan R, Stein J 2002. Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking. J. Finance 57:133–73
    [Google Scholar]
  46. Kisin R, Manela A 2016. The shadow cost of bank capital requirements. Rev. Financ. Stud. 29:71780–820
    [Google Scholar]
  47. Krishnamurthy A, Nagel S, Orlov D 2014. Sizing up repo. J. Finance 69:62381–417
    [Google Scholar]
  48. McDonald R, Paulson A 2015. AIG in hindsight. J. Econ. Perspect. 29:281–105
    [Google Scholar]
  49. Montoro C, Moreno R 2011. The use of reserve requirements as a policy instrument in Latin America. BIS Q. Rev. March:53–65
    [Google Scholar]
  50. O'Brien Y 2007. Reserve requirement systems in OECD countries Work. Pap. 2007-54 Finance Econ. Discuss. Ser., Board Gov. Fed. Reserve Board Washington, DC:
    [Google Scholar]
  51. Ping An Trust, McKinsey. 2013. The Coming Transformation of China's Trust Industry—China Trust Industry Report 2013 Shanghai: McKinsey & Co.
    [Google Scholar]
  52. Pozsar Z 2011. Institutional cash pools and the Triffin dilemma of the U.S. banking system Work. Pap. 11/190 Int. Monet. Fund Washington, DC:
    [Google Scholar]
  53. Rezende M 2014. The effects of bank charter switching on supervisory ratings Work. Pap. 2014-20 Finance Econ. Discuss. Ser., Fed. Reserve Board Washington, DC:
    [Google Scholar]
  54. Rosen R 2003. Is three a crowd? Competition among regulators in banking. J. Money Credit Bank. 35:6967–98
    [Google Scholar]
  55. Schmidt L, Timmermann A, Wermers R 2016. Runs on money market mutual funds. Am. Econ. Rev. 106:92625–57
    [Google Scholar]
  56. Shin H, Zhao L 2013. Firms as surrogate intermediaries: evidence from emerging economies Work. Pap. Bendheim Cent. Finance, Princeton Univ. Princeton, NJ:
    [Google Scholar]
  57. The Economist. 2014. Deposit insurance in China: a premium for risk. The Economist Dec. 4. https://www.economist.com/finance-and-economics/2014/12/04/a-premium-for-risk
    [Google Scholar]
  58. Wang H, Wang H, Wang L, Zhou H 2016. Shadow banking: China's dual-track interest rate liberalization Work. Pap. Dep. Finance, Tsinghua Univ. Beijing:
    [Google Scholar]
  59. Wicker E 1996. The Banking Panics of the Great Depression Cambridge, UK: Cambridge Univ. Press
    [Google Scholar]
  60. Xuan C, Tao L, Jin L, Liang S, Huang X et al. 2014. China financial stability report 2014 Rep. Financ. Stab. Anal. Group, People's Bank China Beijing:
    [Google Scholar]
  61. Zhu X 2017. The varying shadow of China's banking system Work. Pap. 605 Dep. Econ., Univ. Toronto Toronto:
    [Google Scholar]
/content/journals/10.1146/annurev-financial-110217-023025
Loading
/content/journals/10.1146/annurev-financial-110217-023025
Loading

Data & Media loading...

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error