Shadow banking in China: the effects on a state-dominated financial system

Abstract

Shadow banking refers to banking and financial activities that happen outside the traditional banking system. After the Global Financial Crisis (GFC) in 2008, this phenomenon in China has become increasingly relevant as shadow banking products represent important financial sources in different economic sectors, particularly in the private industries as a means to move away from a state-dominated financial system. Indeed, shadow banking in China has its roots in a weak banking system and a fragile regulatory apparatus as the development of the economy in China has not gone hand in hand with the improvement of the financial system. This represented a favorable condition for the growth of alternative channels for raising funds and increasing profits. The rise of this phenomenon in the country has challenged the regulative role of the State which, at least at an early stage, was unable to control the growth of such opaque activities and has increased the risks for banks and entities involved in these activities, jeopardizing the stability of the entire Chinese financial system. In this scenario, the Chinese government promoted different regulatory policies to control the shadow banking business, reduce risks, and avoid a further increase in shadow banking funds. However, the presence of the shadow banking system in the country has not just downsides, but also positive aspects. Indeed, shadow banking products actively contributed to the Chinese fast economic growth, fulfilling the needs of those economic sectors that otherwise would remain unmet by the traditional banking system. The important involvement of shadow banking in Chinese economic development clearly did not go unnoticed by the central government, which while trying to suppress these activities, also stimulated the growth of this phenomenon. The main purpose of the thesis would be to analyze the uneasy relationship between the Chinese government and the shadow banking system, understand how shadow banking influences the State’s policies and choices, as well as identify the contradictions within the Chinese banking system focusing on the role of shadow banking.