Shadow Banking in China: Implications for Financial Stability and Macroeconomic Rebalancing

Shadow banks have grown exponentially in China since 2008 and their impacts on financial stability and real economic growth are highly controversial. This article analyzes the trend, operations, and causes of the surge in shadow banking institutions and activities. In addition, the article investigates the financial and "real" impacts of the shadow banks. Regarding financial impacts, the article discusses the potential risks at the institutional and systemic levels. Given the interconnectedness between shadow banks and the formal banking sector, risks in the shadow banks can easily be transmitted to the major commercial banks. On the one hand, albeit the potential risks, the article finds that the Chinese banking sector is unlikely to encounter a crisis, given the current structure of the Chinese banking system and regulatory framework. On the other hand, despite much lauded "contributions" of shadow banks to the real economy, especially small-and medium-sized enterprises, the article argues that the benefits of shadow banks in financing real productive activities are highly limited.