Shadow banks have grown exponentially in China since 2008. Depending on what is counted, the size of Chinese shadow banks is estimated at between $2.3 trillion and $4.8 trillion as of the end of 2012, which is 2.3% and 4.8% of GDP, respectively. The impact of this is felt heavily in both the financial and industrial sectors, posing significant challenges to the regulatory system and macroeconomic policymaking. The development of shadow banks and the way they are dealt with directly affects China’s short-term financial stability and its long-term sustainable growth. This project mainly revolves around four questions. First, what drives the growth of shadow banking institutions and activities? Second, how did shadow banking evolve over time, and what risks does it entail at both the individual and systemic levels? Third, how do shadow banks affect credit growth and the real, productive sector? And fourth, how does shadow banking pose challenges to policymakers, and what regulatory framework should be instituted? By employing the Modern Money Theory and its extension on the analysis on modern financial systems, this research sheds new, constructive light on the critical issues of shadow banking development and regulation in China.
Shadow Banks in China: Causes, Impacts and Policy Options