The Shadow Banking System of China: Scale, Risks and Regulation---From the perspective of non-traditional credit financing

Authors:  Hu Bin, Zheng Liansheng

Abstract:  As a dynamic and complex three-dimensional system that involves products, institutions, and markets, shadow banking generally refers to credit subjects and businesses outside the traditional commercial banking system with basic functions of maturity transformation, liquidity transformation, and credit risk transformation. Domestic researchers have defined shadow banking under three frameworks: the “regulation theory”, the “risk theory”, and the “non-traditional credit theory”. On the basis of the non-traditional credit perspective, this research has estimated the size of the broadly defined shadow banking system in China at 27 trillion yuan, accounting for 19% of total assets of the banking industry. However, the size of the shadow banking system only constitutes one of the many aspects of the systematic risk in China’s bank dominated financial system. More importantly, the intrinsic non-traditional credit expansion mechanism (shadow banking business) of the banking system has been identified as the major cause of the accumulation of systematic financial risks. Although the development of the shadow banking system is reasonable and innovative, it has also revealed the defects of China’s financial system. Currently, the Chinese financial authorities’ regulation of the shadow banking system has been generally effective, but the pertinence, completeness, and predictability of relevant regulatory policies should be further improved so as to continuously encourage and regulate the development of the shadow banking system without breaking the bottom line of regional and systematic financial risks, and deepen the reform of the financial system in China.

Key words:  shadow banking; non-traditional credit intermediation; systematic risks

Article Full-Text Access:  Full-text Article