Description
The purpose of this paper is to examine recent developments pertaining to China’s shadow
banking sector. Shadow banking has the potential not only to be a beneficial contributor to continued
economic growth, but also to contribute to systematic instability if not properly monitored and
regulated. An assessment is made in this paper as to whether shadow banking is beneficial or harmful
to China’s economic growth.
Journal of Financial Economic Policy
China’s shadow banking sector: beneficial or harmful to economic growth?
J ames R. Barth Tong Li Wen Shi Pei Xu
Article information:
To cite this document:
J ames R. Barth Tong Li Wen Shi Pei Xu , (2015),"China’s shadow banking sector: beneficial or
harmful to economic growth?", J ournal of Financial Economic Policy, Vol. 7 Iss 4 pp. 421 - 445
Permanent link to this document:http://dx.doi.org/10.1108/J FEP-07-2015-0043
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Users who downloaded this article also downloaded:
Tong Li, (2014),"Shadow banking in China: expanding scale, evolving structure", J ournal of Financial
Economic Policy, Vol. 6 Iss 3 pp. 198-211http://dx.doi.org/10.1108/J FEP-11-2013-0061
J acob Kleinow, Tobias Nell, (2015),"Determinants of systemically important banks: the case of
Europe", J ournal of Financial Economic Policy, Vol. 7 Iss 4 pp. 446-476http://dx.doi.org/10.1108/
J FEP-07-2015-0042
Peter Watkins, (2011),"Shadow banking: accounting for Canada's productivity gap", International
J ournal of Productivity and Performance Management, Vol. 60 Iss 8 pp. 857-864 http://
dx.doi.org/10.1108/17410401111182233
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China’s shadow banking sector:
benefcial or harmful to
economic growth?
James R. Barth
College of Business, Auburn University, Auburn, Alabama, USA
Tong Li
FISC, Federal Reserve Bank of San Francisco, Los Angeles,
California, USA
Wen Shi
Department of Economics, Auburn University, Auburn, Alabama, USA, and
Pei Xu
Aviation and Supply Chain Management Department, Auburn University,
Auburn, Alabama, USA
Abstract
Purpose – The purpose of this paper is to examine recent developments pertaining to China’s shadow
banking sector. Shadow banking has the potential not only to be a benefcial contributor to continued
economic growth, but also to contribute to systematic instability if not properly monitored and
regulated. An assessment is made in this paper as to whether shadow banking is benefcial or harmful
to China’s economic growth.
Design/methodology/approach – The authors start with providing an overview of shadow banking
froma global perspective, with information on its recent growth and importance in selected countries. The
authors then focus directly on China’s shadowbanking sector, with information on the various entities and
activities that comprise the sector. Specifcally, the authors examine the interconnections between shadow
banking and regular banking in China and the growth in shadowbanking to overall economic growth, the
growth in the money supply and the growth in commercial bank assets.
Findings – Despite the wide range in the estimates, the trend in the size of shadow banking in China
has been upward over the examined period. There are signifcant interconnections between the shadow
banking sector and the commercial banking sector. Low deposit rate and high reserve requirement
ratios have been the major factors driving its growth. Shadow banking has been a contributor, along
with money growth, to economic growth.
Practical implications – The authors argue that shadow banking may prove useful by diversifying
China’s fnancial sector and providing greater investments and savings opportunities to consumers and
businesses throughout the country, if the risks of shadowbanking are adequately monitored and controlled.
Originality/value – To the authors’ knowledge, this paper is among the few to systematically
evaluate the infuence of shadow banking on China’s economic growth.
Keywords Banks, Financial markets and institutions
Paper type Research paper
The authors are extremely grateful to the assistance provided by Shoushu Chen, Yanfei Sun and
Xiaoyan Wei. Views expressed are those of the authors.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1757-6385.htm
China’s
shadow
banking
sector
421
Received27 July2015
Revised27 July2015
Accepted29 July2015
Journal of Financial Economic
Policy
Vol. 7 No. 4, 2015
pp. 421-445
©Emerald Group Publishing Limited
1757-6385
DOI 10.1108/JFEP-07-2015-0043
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1. Introduction
The world of fnance has undergone a fairly dramatic change in recent years with the
growth of shadow banking. It can broadly be described as the system of liquidity
transformation and credit intermediation that involves entities and activities fully or
partially outside the regular banking system. The non-bank fnancial intermediaries
that comprise shadow banking provide services similar to traditional commercial
banks, but are not regulated or supervised like a bank. More specifcally, shadowbanks
are not subject to capital requirements, loan to deposit ratios or loan loss provisions. Not
being regular banks, moreover, they do not have access to the central bank’s lender of
last resort facility. Of course, shadow banks by offering similar services to commercial
banks provide more competition and more choices for consumers. They can even
contribute to economic growth and development by expanding the availability of
fnancial services. However, as shadow banks have complicated structures and
inter-linkages with commercial banks and are far less heavily regulated than regular
banks, they have the potential to cause systemic risks.
The purpose of this paper is to examine recent developments pertaining to China’s
shadow banking sector. China, unlike many other countries, grew fairly rapidly before,
during and after the recent global fnancial crisis. Its growth rate, however, has slowed
somewhat in recent years, as reliance on exports has declined in favor of continued
reliance on investment and greater emphasis being placed on consumption. Shadow
banking has the potential not only to be a benefcial contributor to continued economic
growth, but also to contribute to systematic instability if not properly monitored and
regulated. An assessment will be made as to whether shadow banking is benefcial or
harmful to China’s economic growth.
The remainder of the paper proceeds as follows. Section 2 provides an overview of
shadow banking from a global perspective, with information on its recent growth and
importance in selected countries. Section 3 focuses directly on China’s shadow banking
sector, with information on the various entities and activities that comprise the sector.
This includes information on the relative growth and importance of these components.
Section 4 discusses the interconnections between shadowbanking and regular banking
in China. It is the existence of these interconnections that pose a systemic risk if shadow
banking were to implode. Section 5 examines the growth in shadow banking to overall
economic growth, the growth in the money supply and the growth in commercial bank
assets. This is followed by a discussion of the factors that explain the reasons for the
growth of shadow banking in Section 6. Given the relatively recent growth in China’s
shadow banking sector and its potential systematic risk, Section 7 discusses China’s
efforts to contain this risk through the implementation of various regulations. Finally,
the concluding comments are presented in Section 8.
2. Global shadow banking in perspective
The size of the global shadowbanking system, of course, depends on howone measures
that system. At the global level, the Financial Stability Board includes the assets of
fnancial institutions other than banks or non-bank fnancial intermediaries (OFIs). As
shown in Figure 1, the size of the global shadow banking system has grown
substantially over the past decade, both in absolute terms as well as relative to global
gross domestic product (GDP). Indeed, it now is $75 trillion or 120 per cent of GDP.
Figure 2 shows the share of global shadow banking system assets accounted for by
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selected countries as well as the total share for the group of Eurozone members for 2007
and 2013. As may be seen, the USA accounts for the largest share of global shadow
banking systemassets at 41 per cent, with the Euro area having the second largest share
at 33 per cent, in 2007. In 2013, however, their positions reversed with the USA share
declining to 33 per cent and the Euro area share increasing to 34 per cent. In terms of
individual countries, Great Britain ranks second in both years, at 11 per cent in 2007 and
12 per cent in 2013. The country with the biggest absolute percentage increase over the
period is China, whose share increased to 4 per cent from 1 per cent or a 300 per cent
increase in just six years.
It is useful to compare the size of the shadowbanking systemin countries to the size
of the regular banking system (which includes all deposit-taking institutions). This is
done for a fairly broad group of countries in Figure 3, with both measures of size being
expressed relative to GDP. The total for the countries indicates that bank assets exceed
Figure 1.
Size of global
shadow banking
system
Figure 2.
Share of global
shadow banking
system by country
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shadow banking assets for both 2012 and 2013. This is also the case for all of the
countries except The Netherlands and the USA.
3. China’s shadow banking sector
There exists a wide range of estimates regarding the size of China’s shadow banking
sector, due to differences in defnitions, classifcations and methodologies. This is
mainly because most shadow banking activities are not subject to disclosure
requirements, despite an offcial defnition of the sector. Specifcally, the People’s Bank
of China offcially defnes shadow banking as credit intermediation involving entities
and activities outside the regular banking system, with the functions of liquidity and
credit transformation, which could potentially cause systemic risks or regulatory
arbitrage (PBOC, 2013). However, different sources provide different estimates of the
size of the shadowbanking sector. Figure 4 shows the range of both private and offcial
estimates for three different years, 2012, 2013 and 2014. Despite the wide range in the
estimates, it is clear that the trend in the size has been upward over the period. More
specifcally, the average size of the shadow banking system based on the estimates has
increased from$3.9 trillion in 2012 to $4.6 trillion in 2013 to $5.3 trillion in 2014. Figure 5
provides the size of China’s shadow banking system as a percentage of its GDP, based
on the various estimates. Once again, despite the wide range in percentages, the trend is
clearly upward over the period. The average size of the shadow banking sector relative
to GDP increased to 52 per cent in 2014 from 47 per cent in 2012 or by 5 percentage
points. Yet even given this increase, China’s shadow banking sector relative to its GDP
is still smaller than that for most other countries, as shown in Figure 3.
The Fung Global Institute (Sheng and Soon, 2015) has provided a recent and excellent
report that identifes the components of China’s shadow banking system. Table I
identifes the components and the reasons for including them as part of the shadow
banking system. The three non-bank fnancial institution/business items are not
Figure 3.
Shadow banking
system assets versus
bank assets for
selected countries
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Figure 4.
Estimates of the
absolute size of
China’s shadow
banking system
Figure 5.
Estimates of the
absolute size of
China’s shadow
banking system
relative to GDP
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included in China’s shadow banking system: money market funds, insurance
companies’ asset management products and asset securitization because they are
considered to be subject to strict regulatory supervision or very small in scale. Such
items may, of course, be included in the defnitions and measures of the size of the
shadow banking system for other countries.
Table I
Components of
China’s shadow
banking system
Non-bank fnancial
institutions/business
Belongs to
shadow banking? Reasons
Credit assets of trust
companies
Yes Subject to regulatory arbitrage, high leverage ratio,
credit risk transformation, potential of systemic risks
Financial Leasing Yes Business includes liquidity and term transformation,
regulation arbitrage exists
Financial guarantees Yes Most of the guarantors are involved in the lending
activities of shadow banks, such as trust, micro credit
companies and P2P platforms. Have the potential of
expanding credit and spreading risks
Pawnshops Yes Non-bank credit intermediary, connected with banks.
Although subject to approval of the Ministry of
Commerce, effective supervision is limited
Microcredit companies Yes Non-bank credit intermediary, connected with banks.
Regulatory arbitrage exists
P2P lending platform Yes Non-bank credit intermediary, currently subject to little
direct regulation. Have complicated lending structure
and risks
Money market funds No Low leverage, or liquidity transformation, are subject
to strict supervision
Entrusted loans Yes Loans removed from fnancial institutions’ balance
sheet and traded as interbank asset
Bankers’ undiscounted
acceptances
Yes Similar to banks’ short-term loans, but removed from
banks’ balance sheet and traded in the interbank
markets
Trust Loans Yes Loans made through bank-trust channel, kept off-
balance-sheet and traded in the interbank market
Off-balance-sheet
Banks’ WMPs
Yes Involves loan assets, packaged and sold to investors.
Different from the above asset aside measures, banks’
WMP is a liability side measure, which may cause
double counting with trust loans and interbank assets
Securities companies’
AMPs
Yes Targeted asset management, includes channel
businesses
Insurance companies’
AMPs
No Do not have the problem of liquidity transformation or
high leverage and are subject to CIRC supervision
Asset securitization No Restarted since 2012, still very small in scale
Private lending Yes The high interest rate portion is subject to high risk.
Private lending can also transfer risks to commercial
banks through a number of channels, such as credit
card lending, commercial papers guarantee companies,
etc
Source: Sheng and Soon (2015)
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The importance of the various components, both in terms of RMB trillion and as a
percentage of banking assets, are provided in Table II. As may be seen, all of the
components have increased in recent years, both in absolute terms and relative to the
assets of the banking system. Indeed, shadowbanking assets have more than doubled in
just three years, reaching 48 RMB trillion at year-end 2014. The size of the shadow
banking systemrelative to the size of the banking sector has also increased to nearly 30
per cent in 2014 from 19 per cent in 2011. Clearly, however, the different items differ in
terms of their relative importance. The most important component is wealth
management products (WMPs), issues by both banks (off-balance-sheet) and securities
frms, which amounted to 15 RMB trillion at year-end 2014. Bank WMPs are considered
to be “quasi-deposits” or liabilities, as the underlying assets are mostly loans from
regular banks or shadow banks. They may be kept either on-balance-sheet or off-
balance-sheet, with the former being guaranteed with principal payment. The off-
balance-sheet WMPs are not guaranteed, with most of the underlying assets being
WMPs from shadow banks. As Wang Yao (in Sheng and Soon, 2015) points out, the
structure of the WMPs process can be quite complex, as banks may use reverse repos to
package discounted bills (short-term loans) into off-balance-sheet WMPs. He adds that
the fnal issuer of the WMP will disclose only the reverse repo as an inter-bank asset,
which means that a higher-risk loan is being disguised as a lower-risk inter-bank asset.
Figure 6 shows this process and how convoluted it can become.
More generally, the creation of WMPs can be done through a fund/asset pool
operation as shown in Figure 7. Different assets may then serve as backing for the
WMPs that are issued. Of course, as the fgure indicates, this process can be quite
opaque with insuffcient information disclosed about the risk characteristics of the
underlying assets. The fund/asset pools, moreover, may have liquidity and maturity
mismatch problems.
The second and third most important components of the shadow banking sector are
entrusted loans and undiscounted banker’s acceptances, respectively. Figure 8 shows
the rapid growth in both of these items from2007 to the frst quarter of 2015. Entrusted
loans are now11 RMBtrillion and undiscounted banker’s acceptances are nearly 7 RMB
trillion. Both of these items are major inter-bank assets, with entrusted loans being
inter-enterprise credit that is sold to banks by principal owners seeking funding through
a bank. Undiscounted banker’s acceptances are created when banks discount credits
between enterprises, with the result that a loan becomes an off-balance-sheet trading
instrument. According to Wang Yao (in Sheng and Soon, 2015), these inter-bank assets
are categorized as components of the shadow banking sector because they are actually
loans between non-bank entities, with commercial banks as guarantors or custodians.
He adds that they are traded as inter-bank assets between banks under repurchase
agreements and categorized as inter-bank assets rather than on their own loans. These
types of inter-bank assets may also be packaged into WMPs of banks.
Trust companies in China can engage in businesses like private equity and asset
securitization that are not available to commercial banks. This enables them to work with
the banks, so that the latter can beneft through such businesses. Figure 9 shows the
tremendous growthintrust fundassets over the past fve years, reachingahighof 13.5RMB
trillioninthe frst quarter of 2015. This is afvefoldincrease inrelativelyshort periodof time.
When the People’s Bank of China tightened credit in 2010 and banks restricted their lending
to property developers and local governments, trust companies became an alternative
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Table II.
Size of different
components of
China’s shadow
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(RMB trillion and %
of banking assets)
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source of funds that fueled their growth. It is important to note that the companies are
trustees, and therefore, the assets under management belong to the benefciaries as do the
risks. Thefgurealsoshowstheamount of trust companyloansseparately. Becausethetrust
companies obtainthe majorityof their funds frombanks, double countingis avoidedonlyby
including the loans that are bought by banks and then end up as WMPs as a component of
the shadowbanking sector, as shown in Table II.
The relationship between trust companies and commercial banks is illustrated in
Figure 10. It also demonstrates the need to avoid double accounting when measuring the
size of the shadow banking sector.
Information on the composition of trust companies assets under management, grouped
by both industry and type of investments are provided in Figure 11.
The remaining components of the shadow banking are relatively smaller but
nevertheless still important. Also, it is interesting to know that according to the PBOC,
Figure 6.
How banks shift
discounted bills into
reverse repos
Figure 7.
Illustration of
asset-backed wealth
management
products
429
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the cost of borrowing in the Wenzhou underground lending market ranged between 21
to 25 per cent from mid-2011 to mid-2012. This market, as indicated in Table II, is 3.4
RMB trillion in size, although the actual size is quite diffcult to determine.
4. Shadow banking and commercial banking interconnections
It is important to realize that China’s shadowbanking sector is substantially fnanced by
the commercial banking sector. According to Sheng and Soon (2015, pp. 90-91):
[…] the trust company sector (now the second largest fnancial sector in China after
commercial banks) is estimated to have 70 per cent of total funds sourced from banks.
Microcredit companies source around 50 per cent of their funding from the banks. Private
money lenders also borrowfunds at offcial rates frombanks and lend out in the usury market.
In other words, as shadow banks cannot fund directly from the public, they source funding
from the banking system or sell WMPs to rich corporations and investors.
Figure 8.
Entrusted loan and
undiscounted
bankers’ acceptances
Figure 9.
Trust fund scale and
loans
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This means that there are signifcant interconnections between the shadow banking
sector and the commercial banking sector. Because China has been a predominately
banking-oriented fnancial system, the growth of the shadow banking system has
provided more diverse overall fnancial sector. At the same time, however, any problems
that arise in one part of the system may spread to other parts of the system. Figure 12
illustrates China’s shadow banking–commercial banking nexus and draws upon some
of the information presented in Table II.
Figure 10.
Illustration of trust
companies’ business
model
Figure 11.
Composition of trust
companies’ assets
under management
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5. Comparative growth in shadow banking
The International Monetary Fund (IMF) has noted that shadow banks have become an
important source of fnancing in China as a natural outcome of a reform process to
diversify a bank-dominated fnancial system. It has also therefore been a contributor,
along with money growth, to economic growth, as shown in Figure 13. As may be seen,
as growth in the money supply (M2) declined substantially after 2009, growth in the
shadow banking sector increased signifcantly. This to some degree increased the
Figure 12.
China’s shadow
banking–commercial
banking nexus
Figure 13.
Shadow banking
recently outpaces
nominal GDP growth
(per cent)
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supply of credit and thereby helped to offset slower growth in the money supply. Indeed,
the money supply declined from a growth rate of 28 per cent in 2009 to only 14 per cent
in 2013. At the same time, the growth rate in shadowbanking increased from11 per cent
in 2009 to 19 per cent and then to 36 per cent in 2011. Subsequently, it rose somewhat to
22 per cent in 2013 before declining to 14 per cent in 2014. The comparative growth rates
in bank credit in shadow banking are shown more vividly in Figure 14.
6. Factors driving growth in shadow banking
The participants in the shadowbanking sector rely on liquidity transformation or credit
transformation or high leverage when conducting business. It has been pointed out that
they make use of low-interest, short-term funds, usually borrowed from the wholesale
Figure 14.
Post-crisis growth of
bank credit and
shadow banking (per
cent, y/y)
Figure 15.
Funding costs are
higher than deposit
rate
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money market and then invest in long-term assets or projects to get higher returns.
Figure 15 shows the average expected annual return of new WMPs as compared to the
one-year nominal deposit rate cap set by the regulatory authorities. It is clear that there
has been a substantial positive gap between the expected return on WMPs and the
allowable rate on commercial bank deposits. It should also be pointed out that the real
deposit rate was negative in 2007, 2010 and 2011 and either 1 per cent or 0 in intervening
years and after 2011 through 2014. It is therefore no surprise that there was a strong
Figure 16.
Reserve requirement
ratios, 2010-2015
Figure 17.
Shadow banking
stabilizing as share
of overall credit
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market demand for higher-yielding saving/investment products by China’s household
and corporate savers (Sheng and Soon, 2015).
At the same time, there were regulatory limitations placed on commercial banks that
impeded their ability to supply as much credit after 2009. As Figure 16 shows, reserve
requirement imposed on banks were raised on fnancial institutions beginning in 2010
Figure 18.
Recent credit fows
have been sustained
by bank lending
Figure 19.
Shadow banking
product mapping
435
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and kept relatively high for a fewyears before being lowered again in 2015. This action,
of course, restricted the extent to which commercial banks could extend credit.
Moody’s investor service has recently issued a report indicating that China’s
shadow banking sector has recently been stabilizing as share of overall credit and
that formal bank loans have increased somewhat, thereby offsetting to some degree
be slow down in the growth of shadow banking. These recent developments are
indicated in Figures 17 and 18.
7. The regulation of shadow banking
At the present time, China’s shadow banking is relatively small by global standards
and, thus, is more a domestic problemthan a threat to the global fnancial system. In this
regard, Yan and Li (2014) point out that China’s shadow banks and shadow banking
activities have the following common features:
Table III.
Regulatory measures
to curtail shadow
banking risks
Date Key regulatory developments
January 2014 The China Banking Regulatory Commission (CBRC) tightens regulations on
shadow banking activities for banks, trust companies, microfnance companies and
credit guarantee companies.*
April 2014 The CBRC strengthens supervision of trust companies, banning non-standardized
capital pool operations that involve covering payouts from maturing WMPs with
the proceeds from sales of new WMPs
May 2014 Three fnancial regulators (CBRC, CSRC and CIRC), together with PBOC and SAFE,
jointly announce new measures on monitoring interbank business among banks
and other fnancial institutions
July 2014 The CBRC further tightens regulations on banks’ wealth management products,
including establishing an independent department for supervision and prohibiting
banks from intra-trading WMPs with the aim of improving the performance of their
portfolios. This is another step the authority has taken to break the practice of
“Rigid Redemption” of WMPs and enhance the risk awareness of investors in
WMPs
December 2014 The CBRC announces plans to encourage banks to invest funds raised through
WMPs directly, rather than engaging the services of trust and security companies
to reduce risky lending in the shadow banking market. Among other things, banks
are to be encouraged to set up their own investment accounts for funds raised from
WMPs
The CBRC and MOF announce plans to establish an insurance fund for the trust
sector, fnanced through funds from trust companies
The Asset Management Association of China announces draft proposals to prohibit
the packaging of local government debt in asset backed securities as a way of
discouraging a further build up of local government debt and to enhance fnancial
stability in the securitization market
January 2015 The CBRC seeks to tighten regulation of entrusted (company-to-company) loans
through proposals to disallow frms from relending bank loans and to prohibit
borrowers of such funds from investing in fnancial assets, such as WMPs, bonds
and equity
Source: Moody’s Investor Service (2015)
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Table IV.
Regulations on
China’s shadow
banking system
WMP CBRC requires banks to limit the investment of wealth management
product proceeds in credit-related assets at any time to below the
lower of 35% of WMP fund balance or 4% of banks’ total assets
CBRC: Banks are also prohibited from providing explicit or implicit
guarantee to these non-standardized credit assets (which include
loans, trust loans, entrusted loans, bank acceptances, letter of credit,
receivables, equity investments with repo clause, etc.)
CBRC: Separate accounting is required for each product. Any
change of asset quality needs to be disclosed to investors within fve
days
CBRC: Banks’ on-sale of other institutions’ products need to be
approved by their headquarters
PBOC bans bond trading between banks’ proprietary book and
WMP accounts and requires banks to have separate accounts for
every WMP
Bank off-balance-sheet
assets
CBRC requires global systemically important banks and banks with
total assets (on- and off-balance-sheet) of over RMB1.6 TN to
disclose 12 indicators by end-July every year. These indicators
include on- and off-balance-sheet assets, interbank assets and
liabilities, fnancial instruments issued, trade payment, entrusted
assets, underwriting business, derivatives, trading and Available
for Sale (AFS) securities, Tier 3 assets and cross-border assets and
liabilities
Trust CBRC requires trust products to discontinue the asset/fund pool
business model
CBRC plans to launch a registry system for trust products and
make trust company staff (including project managers, project
companies, department heads and shareholders) liable for trust
projects for life
LGFV CBRC requires banks
• not to increase bank loan exposure to LGFVs
• incorporate bonds, trust products and wealth management
products into the calculation of total LGFV exposure
• centralize the approval to their headquarters regarding LGFV
bond purchase
• stop providing guarantee to LGFV bonds. In addition, banks
need to contain the share of LGFV loans which are less than
100% cash fow covered or debt/asset ratio is over 80%
New LGFV loans should be extended mainly to provincial-level
LGFVs, social housing projects and central government projects
For LGFV loans maturing this year (2013), banks need to work with
borrowers and local governments and submit detailed loan
collection plans by the end of May. The fnal notice has slightly
loosened the requirements compared to the draft issued previously
Shadow banking The State Council’s guidelines call for tighter regulation of banks’
off-balance-sheet lending and specify that trust companies should
return to their original purpose as asset managers and not engage in
“credit-type” business
Source: Sheng and Soon (2015)
437
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• they involve liquidity transformation or credit transformation or high leverage;
• they are subject to insuffcient or no regulation, do not have access to the central
bank’s lender of last resort facility and are not subject to capital requirements,
loan to deposit ratios or loan loss provisions; and
• they have complicated structures/inter-linkages with other fnancial institutions
and commercial banks and thus have the potential to cause systemic risks.
These characteristics are captured in Figure 19.
Given these characteristics, even though shadowbanking can contribute to economic
growth, it must be carefully monitored and subject to prudential regulation. Table III
indicates that the regulatory authorities have recently taken steps to curtail the risk
associated with bank’s off-balance-sheet WMP assets. More broadly, Table IV shows
the regulations adopted to do with the different components of the shadow banking
system.
8. Conclusion
Shadow banking has become an ever more important development in many countries
around the world in recent years. This has been the case in China as well, though not
nearly to the extent in such countries as the USA. Because China has a heavily oriented
banking system with fairly strict limits on interest rates that can be paid on deposits, it
is no surprise that less regulated fnancial frms took advantage of an opportunity to
offer higher rates of return and help expand the overall availability of credit. The
problem that arises, however, is that if the shadow banking sector was to encounter
serious diffculties, then they may be transmitted throughout the commercial banking
system and thereby contribute to a systemic crisis. To limit the possibility, China has
recently enacted various rules and regulations governing the operations of not only
shadowbanks but also the allowable interrelationships between commercial banks and
shadow banks. Shadow banking may, therefore, prove useful by diversifying China’s
fnancial sector and providing greater investments and savings opportunities to
consumers and businesses throughout the country, if the risks of shadow banking are
adequately monitored and controlled.
References
Financial Stability Board (2014), Global Shadow Banking Monitoring Report, Financial Stability
Board, Washington, DC.
Li, T. (Cindy) (2014), “Shadow banking in China: expanding scale, evolving structure”, Journal of
Financial Economic Policy, Vol. 6 No. 3, pp. 198-211.
Moody’s Investor Service (2015), Quarterly China Shadow Banking Monitor, Moody’s Investor
Service, New York, NY.
Oliver Wyman and Fung Global Institute (2015), Bring Light Upon the Shadow: A Review of the
Chinese Shadow Banking Sector, Oliver Wyman and Fung Global Institute.
People’s Bank of China (2013), available at: www.pbc.gov.cn/publish/html/2015s18.html
Sheng, A., Edelmann, C., Sheng, C. and Hu, J. (2015), Bring Light upon the Shadow: AReviewof the
Chinese Shadow Banking Sector, Oliver Wyman.
Sheng, A. and Soon, N.C. (2015), “Bringing shadow banking into the light: opportunity for
fnancial reform in China”, Fung Global Institute Report.
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Songcheng, S. (2013), Aggregate Financing to the Real Economy, Department of Statistics &
Analysis, People’s Bank of China, Beijing.
Yan, Q. and Li, J. (2014), Chinese Shadow Banking Supervision (Chinese Edition), China Renmin
University Press.
Further reading
China Trustee Association (2015), available at: www.xtxh.net/xtxh/statistics/index.htm
Chinese Banks Wealth Management Annual, 2013 and 2015.
Elliott, D., Arthur, K. and Yu, Q. (2015), Shadow banking in China: A Primer, The Brookings
Institution, Economic Studies, Washington DC.
Holmstrom, B. (2015), “Understanding the role of debt in the fnancial system”, BIS Working
Papers No. 479, Basel.
Li, T. (Cindy) (April 2013), “Shadow banking in china: expanding scale, evolving structure”, Asia
Focus, Federal Reserve Bank of San Francisco.
Ministry of Commerce of the People’s Republic of China (2015),http://ltfzs.mofcom.gov.cn/article/
ckts/cksm/
Securities Association of China (2015), available at: www.sac.net.cn/hysj/zqgsjysj/
Shadow Banking around the Globe: How Large, and How Risky? in Global Financial Stability
Report (October 2014), International Monetary Fund, Monetary and Capital Markets
Department.
Shanghai Clearing House (2015), available at: www.shclearing.com/sjtj/ywfx/201401/t20140103_
30761.html
Yan, Z. and Wang, Y. (2013), Comparison on Shadow Banking Systems of China and US (In
Chinese), CITIC, Beijing.
About the authors
James R. Barth is a Lowder Eminent Scholar at Auburn University and a Senior Fellow at
the Milken Institute. James R. Barth is the corresponding author and can be contacted at:
[email protected]
TongLi is a ResearchFellowat the MilkenInstitute andSenior SupervisoryAnalyst at the Federal
Reserve Bank of San Francisco.
Wen Shi is a PhD Candidate in Economics at Auburn University.
Pei Xu is an Assistant Professor in Business Analytics at Auburn University.
439
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Table AI.
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China’s
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doc_758632363.pdf
The purpose of this paper is to examine recent developments pertaining to China’s shadow
banking sector. Shadow banking has the potential not only to be a beneficial contributor to continued
economic growth, but also to contribute to systematic instability if not properly monitored and
regulated. An assessment is made in this paper as to whether shadow banking is beneficial or harmful
to China’s economic growth.
Journal of Financial Economic Policy
China’s shadow banking sector: beneficial or harmful to economic growth?
J ames R. Barth Tong Li Wen Shi Pei Xu
Article information:
To cite this document:
J ames R. Barth Tong Li Wen Shi Pei Xu , (2015),"China’s shadow banking sector: beneficial or
harmful to economic growth?", J ournal of Financial Economic Policy, Vol. 7 Iss 4 pp. 421 - 445
Permanent link to this document:http://dx.doi.org/10.1108/J FEP-07-2015-0043
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References: this document contains references to 19 other documents.
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Users who downloaded this article also downloaded:
Tong Li, (2014),"Shadow banking in China: expanding scale, evolving structure", J ournal of Financial
Economic Policy, Vol. 6 Iss 3 pp. 198-211http://dx.doi.org/10.1108/J FEP-11-2013-0061
J acob Kleinow, Tobias Nell, (2015),"Determinants of systemically important banks: the case of
Europe", J ournal of Financial Economic Policy, Vol. 7 Iss 4 pp. 446-476http://dx.doi.org/10.1108/
J FEP-07-2015-0042
Peter Watkins, (2011),"Shadow banking: accounting for Canada's productivity gap", International
J ournal of Productivity and Performance Management, Vol. 60 Iss 8 pp. 857-864 http://
dx.doi.org/10.1108/17410401111182233
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China’s shadow banking sector:
benefcial or harmful to
economic growth?
James R. Barth
College of Business, Auburn University, Auburn, Alabama, USA
Tong Li
FISC, Federal Reserve Bank of San Francisco, Los Angeles,
California, USA
Wen Shi
Department of Economics, Auburn University, Auburn, Alabama, USA, and
Pei Xu
Aviation and Supply Chain Management Department, Auburn University,
Auburn, Alabama, USA
Abstract
Purpose – The purpose of this paper is to examine recent developments pertaining to China’s shadow
banking sector. Shadow banking has the potential not only to be a benefcial contributor to continued
economic growth, but also to contribute to systematic instability if not properly monitored and
regulated. An assessment is made in this paper as to whether shadow banking is benefcial or harmful
to China’s economic growth.
Design/methodology/approach – The authors start with providing an overview of shadow banking
froma global perspective, with information on its recent growth and importance in selected countries. The
authors then focus directly on China’s shadowbanking sector, with information on the various entities and
activities that comprise the sector. Specifcally, the authors examine the interconnections between shadow
banking and regular banking in China and the growth in shadowbanking to overall economic growth, the
growth in the money supply and the growth in commercial bank assets.
Findings – Despite the wide range in the estimates, the trend in the size of shadow banking in China
has been upward over the examined period. There are signifcant interconnections between the shadow
banking sector and the commercial banking sector. Low deposit rate and high reserve requirement
ratios have been the major factors driving its growth. Shadow banking has been a contributor, along
with money growth, to economic growth.
Practical implications – The authors argue that shadow banking may prove useful by diversifying
China’s fnancial sector and providing greater investments and savings opportunities to consumers and
businesses throughout the country, if the risks of shadowbanking are adequately monitored and controlled.
Originality/value – To the authors’ knowledge, this paper is among the few to systematically
evaluate the infuence of shadow banking on China’s economic growth.
Keywords Banks, Financial markets and institutions
Paper type Research paper
The authors are extremely grateful to the assistance provided by Shoushu Chen, Yanfei Sun and
Xiaoyan Wei. Views expressed are those of the authors.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1757-6385.htm
China’s
shadow
banking
sector
421
Received27 July2015
Revised27 July2015
Accepted29 July2015
Journal of Financial Economic
Policy
Vol. 7 No. 4, 2015
pp. 421-445
©Emerald Group Publishing Limited
1757-6385
DOI 10.1108/JFEP-07-2015-0043
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1. Introduction
The world of fnance has undergone a fairly dramatic change in recent years with the
growth of shadow banking. It can broadly be described as the system of liquidity
transformation and credit intermediation that involves entities and activities fully or
partially outside the regular banking system. The non-bank fnancial intermediaries
that comprise shadow banking provide services similar to traditional commercial
banks, but are not regulated or supervised like a bank. More specifcally, shadowbanks
are not subject to capital requirements, loan to deposit ratios or loan loss provisions. Not
being regular banks, moreover, they do not have access to the central bank’s lender of
last resort facility. Of course, shadow banks by offering similar services to commercial
banks provide more competition and more choices for consumers. They can even
contribute to economic growth and development by expanding the availability of
fnancial services. However, as shadow banks have complicated structures and
inter-linkages with commercial banks and are far less heavily regulated than regular
banks, they have the potential to cause systemic risks.
The purpose of this paper is to examine recent developments pertaining to China’s
shadow banking sector. China, unlike many other countries, grew fairly rapidly before,
during and after the recent global fnancial crisis. Its growth rate, however, has slowed
somewhat in recent years, as reliance on exports has declined in favor of continued
reliance on investment and greater emphasis being placed on consumption. Shadow
banking has the potential not only to be a benefcial contributor to continued economic
growth, but also to contribute to systematic instability if not properly monitored and
regulated. An assessment will be made as to whether shadow banking is benefcial or
harmful to China’s economic growth.
The remainder of the paper proceeds as follows. Section 2 provides an overview of
shadow banking from a global perspective, with information on its recent growth and
importance in selected countries. Section 3 focuses directly on China’s shadow banking
sector, with information on the various entities and activities that comprise the sector.
This includes information on the relative growth and importance of these components.
Section 4 discusses the interconnections between shadowbanking and regular banking
in China. It is the existence of these interconnections that pose a systemic risk if shadow
banking were to implode. Section 5 examines the growth in shadow banking to overall
economic growth, the growth in the money supply and the growth in commercial bank
assets. This is followed by a discussion of the factors that explain the reasons for the
growth of shadow banking in Section 6. Given the relatively recent growth in China’s
shadow banking sector and its potential systematic risk, Section 7 discusses China’s
efforts to contain this risk through the implementation of various regulations. Finally,
the concluding comments are presented in Section 8.
2. Global shadow banking in perspective
The size of the global shadowbanking system, of course, depends on howone measures
that system. At the global level, the Financial Stability Board includes the assets of
fnancial institutions other than banks or non-bank fnancial intermediaries (OFIs). As
shown in Figure 1, the size of the global shadow banking system has grown
substantially over the past decade, both in absolute terms as well as relative to global
gross domestic product (GDP). Indeed, it now is $75 trillion or 120 per cent of GDP.
Figure 2 shows the share of global shadow banking system assets accounted for by
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selected countries as well as the total share for the group of Eurozone members for 2007
and 2013. As may be seen, the USA accounts for the largest share of global shadow
banking systemassets at 41 per cent, with the Euro area having the second largest share
at 33 per cent, in 2007. In 2013, however, their positions reversed with the USA share
declining to 33 per cent and the Euro area share increasing to 34 per cent. In terms of
individual countries, Great Britain ranks second in both years, at 11 per cent in 2007 and
12 per cent in 2013. The country with the biggest absolute percentage increase over the
period is China, whose share increased to 4 per cent from 1 per cent or a 300 per cent
increase in just six years.
It is useful to compare the size of the shadowbanking systemin countries to the size
of the regular banking system (which includes all deposit-taking institutions). This is
done for a fairly broad group of countries in Figure 3, with both measures of size being
expressed relative to GDP. The total for the countries indicates that bank assets exceed
Figure 1.
Size of global
shadow banking
system
Figure 2.
Share of global
shadow banking
system by country
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shadow banking assets for both 2012 and 2013. This is also the case for all of the
countries except The Netherlands and the USA.
3. China’s shadow banking sector
There exists a wide range of estimates regarding the size of China’s shadow banking
sector, due to differences in defnitions, classifcations and methodologies. This is
mainly because most shadow banking activities are not subject to disclosure
requirements, despite an offcial defnition of the sector. Specifcally, the People’s Bank
of China offcially defnes shadow banking as credit intermediation involving entities
and activities outside the regular banking system, with the functions of liquidity and
credit transformation, which could potentially cause systemic risks or regulatory
arbitrage (PBOC, 2013). However, different sources provide different estimates of the
size of the shadowbanking sector. Figure 4 shows the range of both private and offcial
estimates for three different years, 2012, 2013 and 2014. Despite the wide range in the
estimates, it is clear that the trend in the size has been upward over the period. More
specifcally, the average size of the shadow banking system based on the estimates has
increased from$3.9 trillion in 2012 to $4.6 trillion in 2013 to $5.3 trillion in 2014. Figure 5
provides the size of China’s shadow banking system as a percentage of its GDP, based
on the various estimates. Once again, despite the wide range in percentages, the trend is
clearly upward over the period. The average size of the shadow banking sector relative
to GDP increased to 52 per cent in 2014 from 47 per cent in 2012 or by 5 percentage
points. Yet even given this increase, China’s shadow banking sector relative to its GDP
is still smaller than that for most other countries, as shown in Figure 3.
The Fung Global Institute (Sheng and Soon, 2015) has provided a recent and excellent
report that identifes the components of China’s shadow banking system. Table I
identifes the components and the reasons for including them as part of the shadow
banking system. The three non-bank fnancial institution/business items are not
Figure 3.
Shadow banking
system assets versus
bank assets for
selected countries
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Figure 4.
Estimates of the
absolute size of
China’s shadow
banking system
Figure 5.
Estimates of the
absolute size of
China’s shadow
banking system
relative to GDP
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included in China’s shadow banking system: money market funds, insurance
companies’ asset management products and asset securitization because they are
considered to be subject to strict regulatory supervision or very small in scale. Such
items may, of course, be included in the defnitions and measures of the size of the
shadow banking system for other countries.
Table I
Components of
China’s shadow
banking system
Non-bank fnancial
institutions/business
Belongs to
shadow banking? Reasons
Credit assets of trust
companies
Yes Subject to regulatory arbitrage, high leverage ratio,
credit risk transformation, potential of systemic risks
Financial Leasing Yes Business includes liquidity and term transformation,
regulation arbitrage exists
Financial guarantees Yes Most of the guarantors are involved in the lending
activities of shadow banks, such as trust, micro credit
companies and P2P platforms. Have the potential of
expanding credit and spreading risks
Pawnshops Yes Non-bank credit intermediary, connected with banks.
Although subject to approval of the Ministry of
Commerce, effective supervision is limited
Microcredit companies Yes Non-bank credit intermediary, connected with banks.
Regulatory arbitrage exists
P2P lending platform Yes Non-bank credit intermediary, currently subject to little
direct regulation. Have complicated lending structure
and risks
Money market funds No Low leverage, or liquidity transformation, are subject
to strict supervision
Entrusted loans Yes Loans removed from fnancial institutions’ balance
sheet and traded as interbank asset
Bankers’ undiscounted
acceptances
Yes Similar to banks’ short-term loans, but removed from
banks’ balance sheet and traded in the interbank
markets
Trust Loans Yes Loans made through bank-trust channel, kept off-
balance-sheet and traded in the interbank market
Off-balance-sheet
Banks’ WMPs
Yes Involves loan assets, packaged and sold to investors.
Different from the above asset aside measures, banks’
WMP is a liability side measure, which may cause
double counting with trust loans and interbank assets
Securities companies’
AMPs
Yes Targeted asset management, includes channel
businesses
Insurance companies’
AMPs
No Do not have the problem of liquidity transformation or
high leverage and are subject to CIRC supervision
Asset securitization No Restarted since 2012, still very small in scale
Private lending Yes The high interest rate portion is subject to high risk.
Private lending can also transfer risks to commercial
banks through a number of channels, such as credit
card lending, commercial papers guarantee companies,
etc
Source: Sheng and Soon (2015)
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The importance of the various components, both in terms of RMB trillion and as a
percentage of banking assets, are provided in Table II. As may be seen, all of the
components have increased in recent years, both in absolute terms and relative to the
assets of the banking system. Indeed, shadowbanking assets have more than doubled in
just three years, reaching 48 RMB trillion at year-end 2014. The size of the shadow
banking systemrelative to the size of the banking sector has also increased to nearly 30
per cent in 2014 from 19 per cent in 2011. Clearly, however, the different items differ in
terms of their relative importance. The most important component is wealth
management products (WMPs), issues by both banks (off-balance-sheet) and securities
frms, which amounted to 15 RMB trillion at year-end 2014. Bank WMPs are considered
to be “quasi-deposits” or liabilities, as the underlying assets are mostly loans from
regular banks or shadow banks. They may be kept either on-balance-sheet or off-
balance-sheet, with the former being guaranteed with principal payment. The off-
balance-sheet WMPs are not guaranteed, with most of the underlying assets being
WMPs from shadow banks. As Wang Yao (in Sheng and Soon, 2015) points out, the
structure of the WMPs process can be quite complex, as banks may use reverse repos to
package discounted bills (short-term loans) into off-balance-sheet WMPs. He adds that
the fnal issuer of the WMP will disclose only the reverse repo as an inter-bank asset,
which means that a higher-risk loan is being disguised as a lower-risk inter-bank asset.
Figure 6 shows this process and how convoluted it can become.
More generally, the creation of WMPs can be done through a fund/asset pool
operation as shown in Figure 7. Different assets may then serve as backing for the
WMPs that are issued. Of course, as the fgure indicates, this process can be quite
opaque with insuffcient information disclosed about the risk characteristics of the
underlying assets. The fund/asset pools, moreover, may have liquidity and maturity
mismatch problems.
The second and third most important components of the shadow banking sector are
entrusted loans and undiscounted banker’s acceptances, respectively. Figure 8 shows
the rapid growth in both of these items from2007 to the frst quarter of 2015. Entrusted
loans are now11 RMBtrillion and undiscounted banker’s acceptances are nearly 7 RMB
trillion. Both of these items are major inter-bank assets, with entrusted loans being
inter-enterprise credit that is sold to banks by principal owners seeking funding through
a bank. Undiscounted banker’s acceptances are created when banks discount credits
between enterprises, with the result that a loan becomes an off-balance-sheet trading
instrument. According to Wang Yao (in Sheng and Soon, 2015), these inter-bank assets
are categorized as components of the shadow banking sector because they are actually
loans between non-bank entities, with commercial banks as guarantors or custodians.
He adds that they are traded as inter-bank assets between banks under repurchase
agreements and categorized as inter-bank assets rather than on their own loans. These
types of inter-bank assets may also be packaged into WMPs of banks.
Trust companies in China can engage in businesses like private equity and asset
securitization that are not available to commercial banks. This enables them to work with
the banks, so that the latter can beneft through such businesses. Figure 9 shows the
tremendous growthintrust fundassets over the past fve years, reachingahighof 13.5RMB
trillioninthe frst quarter of 2015. This is afvefoldincrease inrelativelyshort periodof time.
When the People’s Bank of China tightened credit in 2010 and banks restricted their lending
to property developers and local governments, trust companies became an alternative
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Table II.
Size of different
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(RMB trillion and %
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7,4
428
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source of funds that fueled their growth. It is important to note that the companies are
trustees, and therefore, the assets under management belong to the benefciaries as do the
risks. Thefgurealsoshowstheamount of trust companyloansseparately. Becausethetrust
companies obtainthe majorityof their funds frombanks, double countingis avoidedonlyby
including the loans that are bought by banks and then end up as WMPs as a component of
the shadowbanking sector, as shown in Table II.
The relationship between trust companies and commercial banks is illustrated in
Figure 10. It also demonstrates the need to avoid double accounting when measuring the
size of the shadow banking sector.
Information on the composition of trust companies assets under management, grouped
by both industry and type of investments are provided in Figure 11.
The remaining components of the shadow banking are relatively smaller but
nevertheless still important. Also, it is interesting to know that according to the PBOC,
Figure 6.
How banks shift
discounted bills into
reverse repos
Figure 7.
Illustration of
asset-backed wealth
management
products
429
China’s
shadow
banking
sector
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the cost of borrowing in the Wenzhou underground lending market ranged between 21
to 25 per cent from mid-2011 to mid-2012. This market, as indicated in Table II, is 3.4
RMB trillion in size, although the actual size is quite diffcult to determine.
4. Shadow banking and commercial banking interconnections
It is important to realize that China’s shadowbanking sector is substantially fnanced by
the commercial banking sector. According to Sheng and Soon (2015, pp. 90-91):
[…] the trust company sector (now the second largest fnancial sector in China after
commercial banks) is estimated to have 70 per cent of total funds sourced from banks.
Microcredit companies source around 50 per cent of their funding from the banks. Private
money lenders also borrowfunds at offcial rates frombanks and lend out in the usury market.
In other words, as shadow banks cannot fund directly from the public, they source funding
from the banking system or sell WMPs to rich corporations and investors.
Figure 8.
Entrusted loan and
undiscounted
bankers’ acceptances
Figure 9.
Trust fund scale and
loans
JFEP
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This means that there are signifcant interconnections between the shadow banking
sector and the commercial banking sector. Because China has been a predominately
banking-oriented fnancial system, the growth of the shadow banking system has
provided more diverse overall fnancial sector. At the same time, however, any problems
that arise in one part of the system may spread to other parts of the system. Figure 12
illustrates China’s shadow banking–commercial banking nexus and draws upon some
of the information presented in Table II.
Figure 10.
Illustration of trust
companies’ business
model
Figure 11.
Composition of trust
companies’ assets
under management
431
China’s
shadow
banking
sector
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5. Comparative growth in shadow banking
The International Monetary Fund (IMF) has noted that shadow banks have become an
important source of fnancing in China as a natural outcome of a reform process to
diversify a bank-dominated fnancial system. It has also therefore been a contributor,
along with money growth, to economic growth, as shown in Figure 13. As may be seen,
as growth in the money supply (M2) declined substantially after 2009, growth in the
shadow banking sector increased signifcantly. This to some degree increased the
Figure 12.
China’s shadow
banking–commercial
banking nexus
Figure 13.
Shadow banking
recently outpaces
nominal GDP growth
(per cent)
JFEP
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supply of credit and thereby helped to offset slower growth in the money supply. Indeed,
the money supply declined from a growth rate of 28 per cent in 2009 to only 14 per cent
in 2013. At the same time, the growth rate in shadowbanking increased from11 per cent
in 2009 to 19 per cent and then to 36 per cent in 2011. Subsequently, it rose somewhat to
22 per cent in 2013 before declining to 14 per cent in 2014. The comparative growth rates
in bank credit in shadow banking are shown more vividly in Figure 14.
6. Factors driving growth in shadow banking
The participants in the shadowbanking sector rely on liquidity transformation or credit
transformation or high leverage when conducting business. It has been pointed out that
they make use of low-interest, short-term funds, usually borrowed from the wholesale
Figure 14.
Post-crisis growth of
bank credit and
shadow banking (per
cent, y/y)
Figure 15.
Funding costs are
higher than deposit
rate
433
China’s
shadow
banking
sector
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money market and then invest in long-term assets or projects to get higher returns.
Figure 15 shows the average expected annual return of new WMPs as compared to the
one-year nominal deposit rate cap set by the regulatory authorities. It is clear that there
has been a substantial positive gap between the expected return on WMPs and the
allowable rate on commercial bank deposits. It should also be pointed out that the real
deposit rate was negative in 2007, 2010 and 2011 and either 1 per cent or 0 in intervening
years and after 2011 through 2014. It is therefore no surprise that there was a strong
Figure 16.
Reserve requirement
ratios, 2010-2015
Figure 17.
Shadow banking
stabilizing as share
of overall credit
JFEP
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market demand for higher-yielding saving/investment products by China’s household
and corporate savers (Sheng and Soon, 2015).
At the same time, there were regulatory limitations placed on commercial banks that
impeded their ability to supply as much credit after 2009. As Figure 16 shows, reserve
requirement imposed on banks were raised on fnancial institutions beginning in 2010
Figure 18.
Recent credit fows
have been sustained
by bank lending
Figure 19.
Shadow banking
product mapping
435
China’s
shadow
banking
sector
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and kept relatively high for a fewyears before being lowered again in 2015. This action,
of course, restricted the extent to which commercial banks could extend credit.
Moody’s investor service has recently issued a report indicating that China’s
shadow banking sector has recently been stabilizing as share of overall credit and
that formal bank loans have increased somewhat, thereby offsetting to some degree
be slow down in the growth of shadow banking. These recent developments are
indicated in Figures 17 and 18.
7. The regulation of shadow banking
At the present time, China’s shadow banking is relatively small by global standards
and, thus, is more a domestic problemthan a threat to the global fnancial system. In this
regard, Yan and Li (2014) point out that China’s shadow banks and shadow banking
activities have the following common features:
Table III.
Regulatory measures
to curtail shadow
banking risks
Date Key regulatory developments
January 2014 The China Banking Regulatory Commission (CBRC) tightens regulations on
shadow banking activities for banks, trust companies, microfnance companies and
credit guarantee companies.*
April 2014 The CBRC strengthens supervision of trust companies, banning non-standardized
capital pool operations that involve covering payouts from maturing WMPs with
the proceeds from sales of new WMPs
May 2014 Three fnancial regulators (CBRC, CSRC and CIRC), together with PBOC and SAFE,
jointly announce new measures on monitoring interbank business among banks
and other fnancial institutions
July 2014 The CBRC further tightens regulations on banks’ wealth management products,
including establishing an independent department for supervision and prohibiting
banks from intra-trading WMPs with the aim of improving the performance of their
portfolios. This is another step the authority has taken to break the practice of
“Rigid Redemption” of WMPs and enhance the risk awareness of investors in
WMPs
December 2014 The CBRC announces plans to encourage banks to invest funds raised through
WMPs directly, rather than engaging the services of trust and security companies
to reduce risky lending in the shadow banking market. Among other things, banks
are to be encouraged to set up their own investment accounts for funds raised from
WMPs
The CBRC and MOF announce plans to establish an insurance fund for the trust
sector, fnanced through funds from trust companies
The Asset Management Association of China announces draft proposals to prohibit
the packaging of local government debt in asset backed securities as a way of
discouraging a further build up of local government debt and to enhance fnancial
stability in the securitization market
January 2015 The CBRC seeks to tighten regulation of entrusted (company-to-company) loans
through proposals to disallow frms from relending bank loans and to prohibit
borrowers of such funds from investing in fnancial assets, such as WMPs, bonds
and equity
Source: Moody’s Investor Service (2015)
JFEP
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Table IV.
Regulations on
China’s shadow
banking system
WMP CBRC requires banks to limit the investment of wealth management
product proceeds in credit-related assets at any time to below the
lower of 35% of WMP fund balance or 4% of banks’ total assets
CBRC: Banks are also prohibited from providing explicit or implicit
guarantee to these non-standardized credit assets (which include
loans, trust loans, entrusted loans, bank acceptances, letter of credit,
receivables, equity investments with repo clause, etc.)
CBRC: Separate accounting is required for each product. Any
change of asset quality needs to be disclosed to investors within fve
days
CBRC: Banks’ on-sale of other institutions’ products need to be
approved by their headquarters
PBOC bans bond trading between banks’ proprietary book and
WMP accounts and requires banks to have separate accounts for
every WMP
Bank off-balance-sheet
assets
CBRC requires global systemically important banks and banks with
total assets (on- and off-balance-sheet) of over RMB1.6 TN to
disclose 12 indicators by end-July every year. These indicators
include on- and off-balance-sheet assets, interbank assets and
liabilities, fnancial instruments issued, trade payment, entrusted
assets, underwriting business, derivatives, trading and Available
for Sale (AFS) securities, Tier 3 assets and cross-border assets and
liabilities
Trust CBRC requires trust products to discontinue the asset/fund pool
business model
CBRC plans to launch a registry system for trust products and
make trust company staff (including project managers, project
companies, department heads and shareholders) liable for trust
projects for life
LGFV CBRC requires banks
• not to increase bank loan exposure to LGFVs
• incorporate bonds, trust products and wealth management
products into the calculation of total LGFV exposure
• centralize the approval to their headquarters regarding LGFV
bond purchase
• stop providing guarantee to LGFV bonds. In addition, banks
need to contain the share of LGFV loans which are less than
100% cash fow covered or debt/asset ratio is over 80%
New LGFV loans should be extended mainly to provincial-level
LGFVs, social housing projects and central government projects
For LGFV loans maturing this year (2013), banks need to work with
borrowers and local governments and submit detailed loan
collection plans by the end of May. The fnal notice has slightly
loosened the requirements compared to the draft issued previously
Shadow banking The State Council’s guidelines call for tighter regulation of banks’
off-balance-sheet lending and specify that trust companies should
return to their original purpose as asset managers and not engage in
“credit-type” business
Source: Sheng and Soon (2015)
437
China’s
shadow
banking
sector
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• they involve liquidity transformation or credit transformation or high leverage;
• they are subject to insuffcient or no regulation, do not have access to the central
bank’s lender of last resort facility and are not subject to capital requirements,
loan to deposit ratios or loan loss provisions; and
• they have complicated structures/inter-linkages with other fnancial institutions
and commercial banks and thus have the potential to cause systemic risks.
These characteristics are captured in Figure 19.
Given these characteristics, even though shadowbanking can contribute to economic
growth, it must be carefully monitored and subject to prudential regulation. Table III
indicates that the regulatory authorities have recently taken steps to curtail the risk
associated with bank’s off-balance-sheet WMP assets. More broadly, Table IV shows
the regulations adopted to do with the different components of the shadow banking
system.
8. Conclusion
Shadow banking has become an ever more important development in many countries
around the world in recent years. This has been the case in China as well, though not
nearly to the extent in such countries as the USA. Because China has a heavily oriented
banking system with fairly strict limits on interest rates that can be paid on deposits, it
is no surprise that less regulated fnancial frms took advantage of an opportunity to
offer higher rates of return and help expand the overall availability of credit. The
problem that arises, however, is that if the shadow banking sector was to encounter
serious diffculties, then they may be transmitted throughout the commercial banking
system and thereby contribute to a systemic crisis. To limit the possibility, China has
recently enacted various rules and regulations governing the operations of not only
shadowbanks but also the allowable interrelationships between commercial banks and
shadow banks. Shadow banking may, therefore, prove useful by diversifying China’s
fnancial sector and providing greater investments and savings opportunities to
consumers and businesses throughout the country, if the risks of shadow banking are
adequately monitored and controlled.
References
Financial Stability Board (2014), Global Shadow Banking Monitoring Report, Financial Stability
Board, Washington, DC.
Li, T. (Cindy) (2014), “Shadow banking in China: expanding scale, evolving structure”, Journal of
Financial Economic Policy, Vol. 6 No. 3, pp. 198-211.
Moody’s Investor Service (2015), Quarterly China Shadow Banking Monitor, Moody’s Investor
Service, New York, NY.
Oliver Wyman and Fung Global Institute (2015), Bring Light Upon the Shadow: A Review of the
Chinese Shadow Banking Sector, Oliver Wyman and Fung Global Institute.
People’s Bank of China (2013), available at: www.pbc.gov.cn/publish/html/2015s18.html
Sheng, A., Edelmann, C., Sheng, C. and Hu, J. (2015), Bring Light upon the Shadow: AReviewof the
Chinese Shadow Banking Sector, Oliver Wyman.
Sheng, A. and Soon, N.C. (2015), “Bringing shadow banking into the light: opportunity for
fnancial reform in China”, Fung Global Institute Report.
JFEP
7,4
438
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
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U
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3
2
4
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y
2
0
1
6
(
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)
Songcheng, S. (2013), Aggregate Financing to the Real Economy, Department of Statistics &
Analysis, People’s Bank of China, Beijing.
Yan, Q. and Li, J. (2014), Chinese Shadow Banking Supervision (Chinese Edition), China Renmin
University Press.
Further reading
China Trustee Association (2015), available at: www.xtxh.net/xtxh/statistics/index.htm
Chinese Banks Wealth Management Annual, 2013 and 2015.
Elliott, D., Arthur, K. and Yu, Q. (2015), Shadow banking in China: A Primer, The Brookings
Institution, Economic Studies, Washington DC.
Holmstrom, B. (2015), “Understanding the role of debt in the fnancial system”, BIS Working
Papers No. 479, Basel.
Li, T. (Cindy) (April 2013), “Shadow banking in china: expanding scale, evolving structure”, Asia
Focus, Federal Reserve Bank of San Francisco.
Ministry of Commerce of the People’s Republic of China (2015),http://ltfzs.mofcom.gov.cn/article/
ckts/cksm/
Securities Association of China (2015), available at: www.sac.net.cn/hysj/zqgsjysj/
Shadow Banking around the Globe: How Large, and How Risky? in Global Financial Stability
Report (October 2014), International Monetary Fund, Monetary and Capital Markets
Department.
Shanghai Clearing House (2015), available at: www.shclearing.com/sjtj/ywfx/201401/t20140103_
30761.html
Yan, Z. and Wang, Y. (2013), Comparison on Shadow Banking Systems of China and US (In
Chinese), CITIC, Beijing.
About the authors
James R. Barth is a Lowder Eminent Scholar at Auburn University and a Senior Fellow at
the Milken Institute. James R. Barth is the corresponding author and can be contacted at:
[email protected]
TongLi is a ResearchFellowat the MilkenInstitute andSenior SupervisoryAnalyst at the Federal
Reserve Bank of San Francisco.
Wen Shi is a PhD Candidate in Economics at Auburn University.
Pei Xu is an Assistant Professor in Business Analytics at Auburn University.
439
China’s
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Appendix 1
Table AI.
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China’s
shadow
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sector
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P
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(
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doc_758632363.pdf