Abstract
The Asia region is a very interesting playfield from a shadow banking industry perspective. Not only is there the Chinese shadow banking market with its distinct characteristics, products and market participants and with its own set of particularities and intricacies. Clearly driven by its specific economic-political context, it makes headlines pretty much every single week. The same can be said about the Indian shadow banking segment, which for a long time has been decorated with providing real economic benefits to the economy during a period that the largely state-led banking industry didn’t cover large parts of the emerging Indian economy. But there is a wider variety of shadow banking markets in the region, two meaningful international financial centers (Singapore and Hong Kong), and a large set of countries in Central Asia with almost non-existent shadow banking markets often driven by its closed economies, politically controlled banking industry and capital controls.
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- 1.
That happened in cooperation with the International Organization of Securities Commissions’ (IOSCO’s) Asia-Pacific Regional Committee (APRC).
- 2.
The study meant here is FSB, (2014), FSB Regional Consultative Group for Asia. Report on Shadow Banking in Asia. No further reports have been issued by the Group specifically on shadow banking, but the frequent updates of the Group indicate that the growth of nonbank financial intermediation continues to stay on the list of topics being worked on, including the recent press release of 14 June 2019, via fsb.org.
- 3.
FSB, (2014), Global Shadow Banking Monitoring Report, p. 46.
- 4.
See regarding the shadow banking market in Singapore, which is rather typical for a financial center: C. Hofmann, (2017), Shadow Banking in Singapore, Singapore Journal of legal Studies, pp. 18–52, also published in the Research Handbook on Shadow Banking, (Eds.) Iris H.-Y. Chiu and Iain G. MacNeil, Edward Elgar Publishing, Cheltenham, pp. 423–452; Monetary Authority of Singapore, (2017), Do Trust Companies in Singapore Pose Shadow Banking Risks? pp. 65–67, only modest liquidity and maturity transformation risk was observed as they hold large portions of short-term liquid assets.
- 5.
Besides the traditional OFI/HF (other investment fund/hedge funds) presence in Hong Kong as a financial sector, the country has seen shadow lenders emerge like mushrooms, to benefit from the overheated real estate market and are offering shadow banking credit to eager homebuyers who fail to meet the normal criteria for securing bank loans. See E. Yu, (2018), Shadow Banking—‘A Time Bomb in the Making’, July 6, via Chinadailyhk.com. Part of the problem is the continued pegging of the HKD to the USD.
- 6.
FSB, (2014), Global Shadow Banking Monitoring Report, p. 47.
- 7.
FSB, (2014), Global Shadow Banking Monitoring Report, p. 48.
- 8.
Including registration and licensing requirements, conduct regulations, prudential regulations and consumer protection measures.
- 9.
FSB, (2014), Global Shadow Banking Monitoring Report, p. 49.
- 10.
FSB, (2014), Global Shadow Banking Monitoring Report, pp. 50–51.
- 11.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, pp. 21–22.
- 12.
See in detail: FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, pp. 24–34.
- 13.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 7.
- 14.
FSB, (2014), Financial Stability Report, Regional Consultative group for Asia, Report on Shadow Banking in Asia, p. 10.
- 15.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 23.
- 16.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 26.
- 17.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, Exhibit 20, p. 34.
- 18.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 26.
- 19.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, Exhibit 12, p. 27.
- 20.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, Exhibit 12, p. 28; also exhibit 13 for an overview of the credit unions and cooperatives in the region.
- 21.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, Exhibit 14, p. 28.
- 22.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, Exhibit 15, pp. 28–29.
- 23.
In detail see: FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, pp. 35–37.
- 24.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 36.
- 25.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 36.
- 26.
See in detail for an overview of the regulatory systems in Asia: FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, pp. 46–50.
- 27.
See in detail for an overview of the regulatory systems in Asia: FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, pp. 51–53.
- 28.
See: FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, pp. 53–54.
- 29.
L.M. Hui, (2012), Shadow Banking in South-East Asia, Working Paper, mimeo, p. 2.
- 30.
Monetary Authority of Singapore, (2014), Financial Stability Review Singapore, pp. 21–22.
- 31.
Monetary Authority of Singapore, (2013), Financial Stability Review Singapore, p. 66.
- 32.
Monetary Authority of Singapore, (2015), Trends in Financial Intermediation: Implications for Central bank Policy, in BCBS, (2015), What Do New Forms of Finance Mean for EM Central Banks, BIS Paper Nr. 83, pp. 337–346. A material concern in terms of shadow banking are possible spillovers from China’s financial system; see: Monetary Authority of Singapore, (2015), Financial Stability Review, November, p. 4.
- 33.
See in detail: Monetary Authority of Singapore, (2013), Financial Stability Review Singapore, pp. 69–72.
- 34.
Monetary Authority of Singapore, (2013), Financial Stability Review Singapore, p. 72.
- 35.
Monetary Authority of Singapore, (2013), Financial Stability Review Singapore, pp. 73–74.
- 36.
Monetary Authority of Singapore, (2014), Financial Stability Review Singapore, p. 74.
- 37.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 6.
- 38.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 18.
- 39.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 37.
- 40.
FSB, (2014), Financial Stability Report, Regional Consultative Group for Asia, Report on Shadow Banking in Asia, p. 41.
- 41.
J. Yu, (2013), ‘Shadow Banking’ Expands as Hong Kong Brokers Lend to Chinese Businessmen, South China Morning Post, May 13.
- 42.
Hong Kong Monetary Authority, (2013), Half-Yearly Monetary and Financial Stability Report, March 2013, p. 72; also Hong Kong Monetary Authority, (2012), Half-Yearly Monetary and Financial Stability Report, September 2013, p. 7, 15 and 67.
- 43.
Hong Kong Monetary Authority, (2012), Half-Yearly Monetary and Financial Stability Report, September 2013, p. 67 & 69–71, also regarding the lending by listed finance companies.
- 44.
Hong Kong Monetary Authority, (2012), Half-Yearly Monetary and Financial Stability Report, September 2013, p. 70.
- 45.
See for details: CBRE Global Research, (2014), China Shadow Banking and the Real Estate Market, June 14.
- 46.
A. Collier, (2015), Insurance Companies are China’s New Shadow Banks, Financial Times blog, April 28.
- 47.
A. Collier, (2015), ibid.
- 48.
M. B. Shrestha, (2007), Role of Non-Bank Financial Intermediation: Challenges for Central Banks in the SEACEN Countries, SEACEN Centre, Malaysia.
- 49.
See also the annual shadow banking report, in recent years referred to as report on nonbank financial intermediation or market-based finance. See fsb.org.
- 50.
For a full overview: V. H. Nguyen, (2016), Classifying the Shadow Banking in Commercial Banks of Vietnam, International Journal of Humanities and Management Sciences (IJHMS) Vol. 4, Issue 3, pp. 2320–4044.
- 51.
K.A. Martin, (2015), BSP (The Bangko Sentral ng Pilipinas i.e. central bank) Heightens Shadow Banking Surveillance, The Philippine Star, March 10; see for an overview of the Philippine banking system, including the shadow banking component: PCB, (2016), The Philippine banking Sector, via bsp.gov.ph.
- 52.
B.L. Dolar, (2013), Shadow Banking Alive and Well in PH, Manilla Times, June 23.
- 53.
Reserve Bank of Australia (RBA), (2012), Financial Stability Review 2012, pp. 69–71; RBA, (2010), Financial Stability Review, The Shadow Banking System in Australia, Box B, September, pp. 36–38.
- 54.
See for a historical review of shadow banking in Australia and the experiences which have led to the regulatory initiatives taken in recent years: C. Schwartz and T. Carr, (2013), Shadow Banking: Australian and International Experience around Times of Financial Distress and Regulatory Reform, The Finsia Journal of Applied Finance, Issue 3, pp. 30–38.
- 55.
See in detail: J. Manalo et al., (2015), Shadow Banking—International and Domestic Developments, Bulletin Reserve Bank of Australia, March Quarter 2015, pp. 75–83. Also here the growth of the shadow banking sector is intrinsically linked with the subsequent introductions of traditional banking regulation.
- 56.
That went up to 5% in its latest review; see: Reserve Bank of Australia, (2015), Financial Stability Review October, p. 45. It is down from 10% in 2007.
- 57.
J. Manalo et al., (2015), ibid., p. 78.
- 58.
Self-securitization (or retained securitization) is securitization solely for the purpose of using the securities created as collateral with the central bank in order to obtain funding, with no intent to sell them to third-party investors. All securities issued by the SFV are owned by the originating bank and remain on its balance sheet.
- 59.
See for a breakdown of the Australian SB segment: J. Manalo et al., (2015), ibid., p. 78.
- 60.
See also: Reserve Bank of Australia, (2012), Box D: A Closer Look at the Shadow Banking System in Australia, Financial Stability Review, March, pp. 69–72; C. Schwartz and T. Carr, (2013), Shadow Banking: Australian and International Experience around Times of Financial Stress and Regulatory Reform, JASSA: The Finsia Journal of Applied Finance, Issue 3, pp. 30–38.
- 61.
J. Manalo et al., (2015), ibid., pp. 81–82; Reserve Bank of Australia, (2015), Central Clearing of Repos in Australia: A Consultation Paper, March.
- 62.
See: C. Hunt, (2009), Banking Crises in New Zealand – an Historical Perspective, Reserve Bank of New Zealand, Bulletin, Vol. 72, Nr. 4, December, pp. 26–41.
- 63.
RBA, (2015), Financial Stability Review March, p. 25.
- 64.
RBA, (2015), Financial Stability Review October, pp. 45–46.
- 65.
FSB, (2014), ibid., pp. 39–40.
- 66.
FSB, (2014), ibid., pp. 49–50.
- 67.
They cover finance companies, which are involved in activities such as consumer finance, motor vehicle sales or the financing of equipment, and money market corporations which are involved in investment banking.
- 68.
And an effective supply of sufficient ‘safe assets’ which have a reuse ratio of only 1.6 times; see B. Cheung et al., (2014), The Effective Supply of Collateral in Australia, Reserve Bank of Australia Bulletin, Q4 (September), pp. 53–66.
- 69.
See Reserve Bank of Australia (RBA), (2015), Financial Stability Review March 2015, pp. 24–25.
- 70.
RBA, (2015), Financial Stability Review March 2015, pp. 52–53.
- 71.
RBA, (2015), ibid. March, pp. 53–54.
- 72.
See, for example, Federal Reserve Bank of New Zealand, (2014), Financial Stability Report, May, pp. 8, 14–16; Federal Reserve Bank of New Zealand, (2014), Financial Stability Report, November, pp. 7, 10.
- 73.
Reserve Bank of New Zealand, (2018), Safeguarding the Future of Our Financial System, Background paper 1: Who does the Reserve Bank regulate and how should the regulatory perimeter be set? November, p. 31.
- 74.
M. Gishkariany et al., (2017), Shadow Banking Lending to the Residential Property Market, RBA Bulletin September, pp. 45–52; RBA, (2019), Financial Stability Review, April, pp. 56–59.
- 75.
D. Goldbarscht, (2018), Shedding Light on Shadow Banking: The Money or Value Transfer Service Regime in Australia and Its Origins, The Journal of Criminal Law, https://doi.org/10.1177/0022018318773206
- 76.
FSB, (2019), Global Monitoring Report on Non-Bank Financial Intermediation 2018, June 4, p. 20.
- 77.
RBA, (2019), Financial Stability Review, Risks in Non-Bank Lending in India, Box A, April, pp. 19–22. The same holds true by the way for their connectedness with the Chinese economy and their shadow banking segment; see: RBA, (2018), Financial Stability Review, Ongoing Financial Regulatory Reform in China, October, Box A, pp. 19–22, and RBA, (2016), Financial Stability Review, Asset Performance in the Chinese Banking Sector, Box A, pp. 17–19. In fact, in China both the traditional and shadow banking sector ae suffering from material levels of non-performing loans (NPLs ). Also J. Bowman et al., (2018), Non-Bank Financing in China, RBA Bulletin, March, via rba.gov.au.
- 78.
R. Gandhi, (2014), Danger Posed by Shadow Banking Systems to the Global Financial System – the Indian Case, Address by R. Gandhi, Deputy Governor of the Reserve Bank of India, at Indian Council for Research on International Economic Relations’ (ICRIER’s) International Conference ‘Governance & Development: Views from G20 Countries’, Mumbai, 21 August 2014, pp. 4–5.
- 79.
R. Gandhi, (2014), ibid., p. 6.
- 80.
R. Gandhi, (2014), ibid., p. 7; see also: S. Ghosh, et al., (2012), Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets?, Economic Premise, World Bank, Nr. 88, September; Reserve Bank of India, (2013), Report on Trend and Progress of Banking in India – 2012–13; see also in detail: N. Nandini and M. Jeyanthi, (2014), Concept of Shadow Banking in India, Global Journal for Research Analysis, Vol. 3, Issue 11 (November), pp. 60–62.
- 81.
V.V. Acharya et al., (2013), The Growth of a Shadow Banking System in Emerging Markets: Evidence from India, Journal of International Money and Finance Vol. 39, pp. 207–230.
- 82.
S. Choudhury, (2015), RBI Tightens Takeover Rules for Shadow banks, Reuters, March 30.
- 83.
H. Sender, (2015), India’s Shadow Banks Lend Where Others Fear to Thread, Financial Times, May 25.
- 84.
See in detail: V.V. Acharya et al., (2014), The Growth of a Shadow banking System in Emerging Markets: Evidence from India, Working Paper, mimeo.
- 85.
See (also for a comparison): D. Sherpa, (2013), Shadow Banking in India and China, Causes and Consequences, Economic and Political Weekly, Vol. 48, Nr. 43, pp. 113–122.
- 86.
H. Senders, (2015), India’s Shadow banks lend Where Others Fear to Thread, Financial Times, May 25.
- 87.
See for a detailed breakdown: A. Sinha, (2013), Regulation of Shadow Banking—Issue and Challenges, Address by Anand Sinha, Deputy Governor, Reserve Bank of India at the event organized by the Indian Merchants’ Chamber, Mumbai on 7 January 2013, pp. 9 ff.
- 88.
See S. Choudhury, (2015), RBI tightens Takeover Rules for Shadow Banking, Reuters, March 30.
- 89.
With often rates up till 25–30%; see: K. Mehrotra and A. Antony, (2012), Cash-for-Gold Loans Hide Shadow banking Risks in India, Bloomberg Business, December 20.
- 90.
IBS, (2013), Note on the Mutual Fund Industry in India, Richard Ivey School of Business, March 7. Please refer for more granular data to www.amfiindia.com (Association of Mutual Funds in India or AMFI).
- 91.
S. Gokarn, (2011), Mutual Funds and Market Development in India, Address by Dr. Subir Gokarn, Deputy Governor of the Reserve Bank of India, at the Confederation of Indian Industry (CII) 7th Edition of Mutual Fund Summit 2011, Mumbai, 22 June.
- 92.
They seem to use template securitization models built upon their Indian Generally Accepted Accounting Principles (GAAP) rules. See in detail: J. Romero-Torres et al., (2017), Securitization in India, Managing Capital Constraints and Creating Liquidity to Fund Infrastructure Assets, Asian Development Bank Report, in particular pp. 83 ff.
- 93.
R. Gandhi, (2015), Securitisation in India – Ambling Down or Revving Up?, Inaugural speech by R. Gandhi, Deputy Governor of the Reserve Bank of India, at the ‘India Securitisation Summit 2015’, organized by the National Institute of Securities Markets, pp. 3–6, for those legislative and supervisory changes and initiatives that occurred in recent years on the matter. They follow a typical pattern as observed in US and European regulation (risk retention, tranching, minimal holding period, due diligence and compliance, etc.) (NISM), Mumbai, 14 July 2015.
- 94.
R. Gandhi, (2015), ibid., pp. 6–7. See also more recent: J. Romero-Torres et al., (2017), Securitization in India, Managing Capital Constraints and Creating Liquidity to Fund Infrastructure Assets, Asian Development Bank Report, in particular pp. 22–38.
- 95.
See for a write-up of the history and role of the NBFCs in India and their risk exposure (leverage, overreliance on short-term wholesale funding, etc.): RBI, (2017), Non-Banking Finance Companies in India’s Financial Landscape, Bulletin, October, pp. 91–104.
- 96.
Reserve Bank of India (RBI), (2018), ‘Box VI.1: What Explains the Robust Credit Growth of NBFCs?’, Report on Trend and Progress of Banking in India 2017–18, pp. 121–122. Also: S. Mundra, (2015), Indian Banking Sector: Emerging Challenges and Way Forward, Lecture organized by State Bank of Mysore, Bangalore, 29 April; IMF (2017), Financial System Stability Assessment for India, December; S. Mundy and H. Sender, (2018), How the Rise of Shadow Banking Fed India’s Clash of Ego’s, FT November 22; P. Jenkins, (2018), India’s Shadow Banks Risk Repeating Crisis-Era Mistakes, FT, November 12.
- 97.
Refinancing the obligations poses a challenge as investor concerns flare amid mounting problems such as auditors quitting, repayment problems and allegations of embezzlement, confirms A. Joshi, (2019), Huge Wall of Maturing Debt Looms for India’s Shadow Lenders, Bloomberg, June 18, bloomberg.com; S. Ghosh, (2019), Shadow Banking Crisis Raises Risk of Indian Bad-Loan Redux, June 16. Via Bloomberg.com
- 98.
RBI, (2019), Liquidity Risk Management Framework for Non-Banking Financial companies and Core Investment Companies – Draft Guidelines for public comments, May 24, via rbi.org.in
- 99.
S. Ghosh and S. Srivastava, (2019), India Shadow Lenders Face Margin Squeeze From RBI Guidelines, May 28, via Bloomberg.com
- 100.
FSB, (2014), Report on Shadow Banking in Asia, Regional Consultative Group for Asia, Basel, p. 6.
- 101.
OFI asset is around 10% of the total financial system while depository corporations’ asset has still occupied about a half of the total; see S. Konno, et al., (2013), Compiling Statistics of Shadow Banking, Working Paper, p. 2.
- 102.
FSB, (2014), ibid., p. 20.
- 103.
FSB, (2014), ibid., p. 21.
- 104.
FSB, (2014), ibid., pp. 23, 26. Further details of the Japanese shadow banking sector pp. 27–30. See for a study specific for the Japanese MMF market and its distinct challenges: Bank of Japan, (2013), Trends in and Challenges for the Money Market in Japan. Results of the Tokyo Money Market Survey, Financial Markets Department, Tokyo, May.
- 105.
A. Miyanoya, (2011), Shadow Banking—Japan’s experiences and the BoJ’s approaches, Director-General, Financial System and Bank Examination Dept., Bank of Japan, Presentation, June 1, p. 4.
- 106.
See for a detailed analysis of the Japanese shadow banking entities and transactions: S. Konno, et al., (2013), ibid., pp. 3–17.
- 107.
Bank of Japan, (2015), Amounts Outstanding of Securitized Products, Research and Statistics Department, Tokyo, March 18. The total amount of securitized products outstanding in 2008 was JPY 45 trillion. That amount dropped to JPY 32.8 trillion and showed on a year-on-year basis a continuous decline. The only subsegment that grew was the mortgage-backed securities (MBS) issued by the Japan Housing Finance Agency (i.e. publicly backed mortgages).
- 108.
IMF, (2014), Financial Stability Review, Chapter Two: Shadow Banking around the Globe, Washington, DC, pp. 67, 73–74, 81–83.
- 109.
See for an in-depth revision of the Japanese banking sector, oversight and compliance measures per subgroup: K. Kodachi, (2013), The Development of the Shadow Banking System, the Accumulation of Shadow Banking Risks, and the State of the Japanese Shadow Banking Sector, FSA Institute, Discussion Paper Series Nr. DP2013–6, Tokyo, July.
- 110.
A. Hattori, et al., (2014), A Survey of Systemic Risk Measures: Methodology and Application to the Japanese Market, Institute for Monetary and Economic Studies (IMES), Bank of Japan, Discussion Paper Nr. 2014-E-3, Tokyo.
- 111.
H. Aoyama, (2013), Systemic Risk in a Japanese Financial Network, Department of Physics Working Paper, Kyoto University, January 31.
- 112.
M. Kanno, (2014), Assessing Systemic Risk Based on Interbank Exposures in the Japanese Banking System, Kanagawa University Working Paper, November 27.
- 113.
For a nice write-up of the history of securitization in Japan, see: M. Fagan, (2014), Case Study: Facilitating Securitization in Japan, Working Paper, mimeo. It also contains interesting references to somewhat older literature regarding the securitization market and certain technical and legal issues specific for Japan.
- 114.
See for details: Bank of Japan, (2015), Amounts Outstanding of Securitized Products, Research and Statistics Department, September 17, Tokyo, and the relevance of real estate securitization: The Real Estate Securitization Handbook, via ares.or.jp
- 115.
K. Lai, (2019), Japan’s Proposed Retention Rule for Securitisation, International Financial Law Review, February 22, uflr.com. Data regarding securitization volumes and breakdowns to be found in the annual ASIFMA Securitization in Asia 2018, asifma.org.
- 116.
Y. Young-Sil, (2018), S. Korea’s Shadow Banking Amounts to 2 Quadrillion Won, BOK Estimates, November 7, businesskorea.co.kr. About 25% of that is allocated to the real estate sector. Y. Yoon-Sil, (2019), S. Korea’s Real Estate Shadow Banking Amounts to 470 Tril. Won, January 14, businesskorea.co.kr. Twenty percent of those loans face non-performing status or default: B. Hyunjung, (2019), Nonbank Lending Raises Volatility in Real Estate Market: Think Thank, January 14, koreaherald.com
- 117.
FSB, (2014), ibid., p. 53.
- 118.
Limited literature is available regarding shadow banking in Indonesia. The FSB has issued a by-now somewhat outdated report on the implementation of the FSB/G20 recommendations which include shadow banking measures. See FSB, (2013), IMN Survey of National Progress in the Implementation of G20/FSB Recommendations, via fsb.org. A small window of information can be found in Bank Indonesia, (2014), Financial Stability Review, Nr. 23, September, pp. 63, 86. The FSB reports that OFIs in Indonesia grow at an above-trend rate, OFI assets are a large segment of total financial assets, and OFI funding comes from banks an above-level volumes (> 15%), pp. 16, 25, 34. Regarding the systemic risk in Indonesia’s banking system, see: A. Mansur, (2018), Measuring Systemic Risk on Indonesia’s Banking System. Published in: Kajian Ekonomi dan Keuangan, Vol. 2, Nr. 2, 4 June, pp. 94–105.
- 119.
FSB, (2014), ibid., p. 56.
- 120.
FSB, (2014), ibid., p. 45. H.S. Lee, (2015), Korea’ Shadow Banking: A Risk Diagnosis and Future Development, KCMI Paper, via kcmi.re.kr
- 121.
Y. Pan, (2014), Shadow banking Systems in ASEAN, Presentation Institute of Sino-ASEAN Research.
- 122.
M. Y. M. Isa and Z.H. A. Rashid, (2014), Shadow Banking Credit Intermediation: Determinants of Default Risks in Securitization and Collateralization, Journal of Modern Accounting and Auditing, November, Vol. 10, Nr. 11, pp. 1–11; C.A. Zabala, and J.M. Josse, (2014), Shadow Credit and the Private, Middle Market: Pre-Crisis and Post-Crisis Developments, data trends, and two examples of private, nonbank lending, The Journal of Risk Finance, Vol. 15, Issue 3, pp. 214–233. See for a full study on Malaysia’s shadow banking market: N. S. Yi et al., (2017), Risks and Vulnerabilities of Shadow Banks: the case in Malaysia, Bachelor Thesis, August, via utar.edu.my
- 123.
BNM, (2011), Financial Stability and Payment Systems Report 2011, Kuala Lumpur, pp. 43–48.
- 124.
See in detail M.A.M. Farid, (2011), Monitoring Shadow Banking and its Challenges: the Malaysian Experience, BNM Working Paper, also via bis.org.
- 125.
See BNM’s Financial Stability and Payment Systems Report 2011, White Box Article: Non-bank Intermediaries in Malaysia.
- 126.
Farid, (2011), ibid., pp. 7 ff.
- 127.
Farid, (2011), ibid., pp. 10 ff.
- 128.
MMFs are usually funds that invest in high-quality and low-duration fixed-income instruments such as commercial paper and the US Treasury Bill, which are not prevalent in Malaysia. Therefore, UTFs do not transmit the same kind of shocks to the financial system as the MMFs do in the US.
- 129.
Farid, (2011), ibid., pp. 11.
- 130.
Farid, (2011), ibid., pp. 12 ff.
- 131.
M.B. Shrestha, (2007), Role of Non-Bank Financial Intermediation: Challenges for Central Banks in the SEACEN Countries, Working Paper, mimeo.
- 132.
Z. Pozsar, et al., (2010), Shadow Banking, Staff Report Nr. 458, Federal Reserve Bank of New York; J. Carmichael and M. Pomerleano, (2002), The Development and Regulation of Non-Bank Financial Institutions, World Bank Working Paper.
- 133.
N. Endut and G.H. Toh, (2009), Household Debt in Malaysia. BIS Paper Nr. 46, Bank for International Settlement, Basel.
- 134.
Farid, (2011), ibid., pp. 13–14.
- 135.
Farid, (2011), ibid., pp. 16–17.
- 136.
Farid, (2011), ibid., pp. 18–21.
- 137.
See also the NBFI case study in the FSBs Global Monitoring Report 2014: FSB, (2014), Global Shadow Banking Monitoring Report 2014, August 22, pp. 74–78.
- 138.
C.A. Zabala and J.M. Josse, (2014), Shadow Credit and the Private Middle Market: Pre-Crisis and Post-Crisis Developments, Data Trends and Two Examples of Private Non-Bank Lending, The Journal of Risk Finance, Vol. 15, Issue 3, pp. 214–233.
- 139.
See also Bank Negara Malaysia’s Annual Report and Financial Stability and payment Systems Report, KL.
- 140.
See recently on the Malaysian situation: M.J.M. Isa and Z.H.A. Rashid, (2014), Shadow Banking Credit Intermediation: Determinants of Default Risks in Securitization and Collateralization, Journal of Modern Accounting and Auditing, Vol. 10 (November), Nr. 11.
- 141.
See for a very comprehensive overview of the Chinese shadow banking system: J. Li and S. Hsu, (2012), The Annual Report of China Shadow Banking System, Project Sponsored by the National Natural Science Foundation of China, Project Number 71173246; CFA, (2015), Shadow Banking: Policy Frameworks and Investor Perspectives on Market-Based Finance, April, pp. 31–37.
- 142.
Some of those constraints include the following: (1) there are caps on bank lending volumes imposed by the People’s Bank of China (PBOC); (2) the limit of bank loans to deposits of 75% is constraining (the four largest banks are exempt from this rule; they have much lower loan-to-deposit ratios); (3) regulators discourage lending to certain industries; (4) most nonbank channels have lower capital and liquidity requirements; (5) shadow banks are not subject to bank limits on loan or deposit rates; (6) shadow banking avoids costly PBOC reserve requirements; see: D. Elliott et al., (2015), Shadow banking in China: a Primer, Economic Studies at Brooking, March, pp. 1 & 11–12. See for a further analysis of (some of) these criteria as a trigger for the Chinese SB system: K. Hachem and Z. M. Song, (2015), The Rise of China’s Shadow Banking System, Chicago Booth School of Business Working Paper, January.
- 143.
FSB, (2015), China Peer Review Report, August 13, pp. 28–29. See also for a comparison across the different estimation sources: D. Elliott et al., (2015), Shadow banking in China: a Primer, Economic Studies at Brooking, March, pp. 8–9 and appendix B (pp. 25–26).
- 144.
W. Jiang, (2015), The Future of Shadow Banking in China, Columbia Business School, White Paper, p. 4.
- 145.
D. Elliott et al., (2015), ibid., pp. 10–11.
- 146.
Adapted from: B. Hu, and Z. Liansheng, (2014), The Shadow Banking System: In a Non-traditional Credit Intermediation Perspective, [In Chinese], In China Annual Financial Regulation and Supervision Report, Social Sciences Academic Press, May. See for a full scope analysis of the Chinese Shadow banking System: FGI (Fung Global Institute), (2015), Bringing Shadow banking into the Light: Opportunity for Financial Reform in China, (eds. A. Sheng and N.G. Soon), March; also: L. Guo and D. Xia, (2014), In Search of a Place in the Sun: The Shadow Banking System with Chinese Characteristics, European Business Organization Law Review, Vol. 15, pp. 387–418.
- 147.
See for a good overview of the China shadow banking segment: FSB, (2015), China Peer Review Report, August 13, pp. 27–42 and 54–58. See for a nice write-up of the SB segment within the context of the total China financial infrastructure: P. Buitelaar, (2014), Chinese Banks: Risks and Challenges, DNB Occasional Studies, Vol. 12 Nr. 4, pp. 17–27; also: S. Hsu et al., (2014), Shadow Banking and Systemic Risk in China, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Nr. 349, May, pp. 4–8; S. Hsu and J. Li, (2015), The Rise and Fall of Shadow Banking in China, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Nr. 375, February, pp. 6–12.
- 148.
See in detail: FSB, (2015), ibid., p. 31. N. Zhu et al. (ADB), (2014), Knowledge Work on Shadow Banking – Trust Funds and Wealth Management Products, Project Number: SC 102486, May.
- 149.
See in detail: FSB, (2015), ibid., pp. 31 and 56–57. Also D. Awrey, (2015), Law and Finance in the Chinese Shadow Banking System, Cornell International Law Journal, Vol. 48, Issue 1, pp. 3–49, in particular pp. 21–45 for the WMP analysis.
- 150.
See in detail: S. Wei, (2015), Wealth Management Products in the Context of China’s Shadow Banking: Systemic Risks, Consumer Protection and Regulatory Instruments, Asia Pacific Law Journal, Vol. 23 Nr. 1, pp. 55–85, in particular pp. 62–65. For the systemic risk dynamics in the product group and the moral hazard issue with tools for neutralizing them, see pp. 66–78.
- 151.
FSB, (2015), ibid., pp. 31 and 55. The trust industry exists since 1979 but has been firmly redesigned in 2004. There is a variety of parties behind the trust companies; remarkable though is that the trust companies without state backing have the highest leverage. Given that more than 90% of the trust fund sector is managed by trust companies with at least one state-owned enterprise (SOE) or local government as parent company, this is likely to reduce the probability of systematic default risk.
- 152.
FSB, (2015), ibid., pp. 30–31 and 54.
- 153.
The volume of entrusted loans increases when the official credit is tight and therefore are a market solution to credit shortage; see in detail: F. Allen et al., (2015), Entrusted Loans: A Close Look at China’s Shadow Banking System, Working Paper, June, mimeo. F. Allen, et al., (2005), Law, Finance, and Economic Growth in China, Journal of Financial Economics, Vol. 77, Issue 1, pp. 57–116. Moody’s, (2013), Risks to China’s Lenders from Shadow Banking: Frequently Asked Questions; Z. Song, et al., (2011), Growing Like China. American Economic Review, Vol. 101, Issue 1, pp. 196–233.
- 154.
They tend to be large firms with large cash holdings that engage in and offer entrusted loans. They provide affiliated and nonaffiliated loans with the latter carrying a much higher interest rate and the affiliated one often below-market rates. They constitute an alternative investment channel for these lenders. Pricing of these instruments seems to be risk based. For a further typology, see F. Allen et al., (2015), Entrusted Loans: A Close Look at China’s Shadow Banking System, Working Paper, June, pp. 4–5.
- 155.
They are prone to a lot of moral hazard due to their closeness to local governments: S. Hsu and J. Li, (2015), ibid., pp. 8.
- 156.
See Asia Development Bank (‘ADB’), (2013), Local Debt in the People’s Republic of China: Local Government Financing Vehicle’s Debt Management and Risk Control – Replacing Shadow Bank Financing with Local Government Bond, October.
- 157.
See for a full analysis of LGFPs: Y. Lu and T. Sun, (2013), Local Government Financing Platforms in China: A Fortune or Misfortune, IMF Working Paper Nr. WP/13/243. Also see: Y.S. Zhang and S. Barnett, (2015), Fiscal Vulnerabilities and Risks from Local Government Finance in China, IMF Working Paper Nr. WP/14/4; L.F. Goodstadt, (2014), The Local Government Crisis 2007–2014: When China’s Financial management Faltered, Hong Kong Institute for Monetary Research Paper Nr. 27/2014, October; Claret Consulting, (2015), Overview of Local Government and Infrastructure Finance in China, Presentation, November; L. Fan, (2014), Quench a Thirst with Poison?—Local Government Financing Vehicles’ Past, Present and Future, via web.law.columbia.edu
- 158.
L. Wei, (2015), China Backtracks on Local Government Debt, WSJ, May 15. The authorities relaxed controls on the ability of local governments to raise money by allowing them to tap government-sponsored financing companies. That despite the fact that they in October 2014 issued a resolution intended to prevent those financing firms from taking on new debt. Things need to be placed and judged within the framework of the Long-Term development plans of the Party. See also: J. Anderlini, (2015), China Orders Banks to Keep Lending to Insolvent State Projects, Financial Times, May 15.
- 159.
Reflecting the nature of their collateral, real estate variables are important drivers of Chengtou bond yields, as are other macro-fundamentals and liquidity characteristics. Ang et al. find a significantly positive relation between Chengtou yields and an index of local government corruption; see: A. Ang et al., (2015), The Great Wall of Debt: The Cross Section of Chinese Local Government Spreads, Working Paper, May 5, mimeo. Interesting further was that they found a positive correlation between Chengtou yields and an index of local government corruption.
- 160.
Although our discussion regarding MMFs has put the light on the floating NAV mode, Chinese regulators are still assessing the risks involved with the rapid growth of MMFs and have yet to take any concrete measures to address the susceptibility of MMFs to ‘runs’.
- 161.
F. Allen, et al., (2013), Understanding Informal Financing, Working Paper, mimeo; M. Ayyagari, et al., (2010), Formal versus Informal Finance: Evidence from China. Review of Financial Studies Vol. 23, pp. 3048–3097.
- 162.
J. Li et al., (2014), Shadow Banking in China: Dimensions, Risks, Prospects, Working Paper, mimeo, pp. 13–14. See also for the less known negotiable securities company (pp. 12–13) and small loan companies (pp. 16–17).
- 163.
J. Li et al., (2014), Shadow Banking in China: Dimensions, Risks, Prospects, Working Paper, mimeo, pp. 6–9. Also: Y. Huang, et al., (2012), China’s Shadow Banking be Another Sub-prime Debt?, International Economic Review, Vol. 2, pp. 42–52; P. Wang, Pan, et al., (2012), Folk Lending: Transforming with Obvious Risk Transmission, Economic Information Daily, May 7, p. 6.
- 164.
G. Wildau, (2015), China Shadow Banks Appeal for Government Bailout, Financial Times, August 18. The case regards Hebei Financing Investment Guarantee Group who guaranteed about USD 8 billion in credit and could lead to a default of a few dozen WMPs when it would default itself.
- 165.
They operate in four models and are both unregulated: (1) a platform for simply matching lending and borrowing information; (2) a platform with guarantee or other credit support facilities from the P2P platform operator or its affiliates; (3) a repackaging and sale of credit assets through securitization and other financial engineering techniques, and (4) a transfer of credit assets created by a P2P platform operator or its affiliates to end investors. See: Clifford Chance, (2015), Shadow Banking and Recent Regulatory Developments in China, January, p. 6. Model two and four facilitate credit creation by leveraging the creditworthiness of the P2P platform and its affiliates, while Model 3 additionally involves liquidity mismatch if it uses ‘asset pool’ techniques to fund long-term assets by taking in short-term investments from clients on a rolling basis (pp. 7–8).
- 166.
D. Tao and W. Deng, (2015), China: Trust Funds and Shadow Banking, Credit Suisse Economic Research, February 17, p. 26.
- 167.
See a comparison with trust companies: D. Tao and W. Deng, (2015), ibid., pp. 26–27.
- 168.
D. Tao and W. Deng, (2015), ibid., pp. 27–28.
- 169.
Thompson Reuters/RMBISA, (2014), Chinese Shadow Banking: Key Risk Indicators and Risk Scenarios, p. 4.
- 170.
See in detail: W. Zhang et al., (2015), Corporate Leverage in China: Why has It Increased Fast in Recent Years and Where do the Risks Lie?, Hong Kong Institute for Monetary Research Working Paper Nr. 10/2015, April. That overleveraging has yielded weakened debt-service capacity and overall weakening of fund-use efficiency. Also see: H. Wang, (2015), How Bank Competition Affects Lending Terms in China? — Evidence from Loan Level Data, Hong Kong Institute for Monetary Research Working Paper, mimeo.
- 171.
See in detail: T. V. Dang et al., (2014), Chinese Shadow Banking: Bank-Centric Misperceptions, Hong Kong Institute for Monetary Research Working Paper Nr. 22/2014, September.
- 172.
FSB, (2015), ibid., p. 29.
- 173.
FSB, (2015), ibid., p. 30.
- 174.
See also: P. Buitelaar, (2014), Chinese Banks—Risks and Challenges, DNB Occasional Studies Vol. 12 Nr. 4, pp. 24–25.
- 175.
FSB, (2015), ibid. pp., 33–36. See also Clifford Chance, (2015), Shadow Banking and Recent Regulatory Developments in China, January. Their efforts mainly relate to circular 107 that, although drafted in 2013, became public only in 2014. The circular provides for a three-layered shadow banking division and warns of some systemic risk implications. Circular Nr. 107 is meant to apply to: (1) ‘unlicensed, unregulated credit intermediation’ (e.g. online finance companies); (2) ‘unlicensed but lightly regulated credit intermediation’ (e.g. credit guarantee and microcredit companies); (3) ‘licensed but insufficiently regulated financing activities (including those conducted by money market funds, informal finance securitization, and some wealth management businesses)’; see M. Badkar, (2014), China is getting serious about its crackdown on shadow banking. Business Insider, January 6.
- 176.
Data source: CBRC.
- 177.
Thompson Reuters/RMBISA, (2014), ibid.
- 178.
See in detail: Thompson Reuters/RMBISA, (2014), Chinese Shadow Banking: Key Risk Indicators and Risk Scenarios, pp. 6–7. D.J. Elliott and K. Yan, (2013), The Chinese Financial System. An Introduction and Overview, John L. Thornton China Center Monograph Series, Number 6, July 2013.
- 179.
Thompson Reuters/RMBISA, (2014), ibid., p. 6.
- 180.
A. Sheng and Ng. Chow Soon (eds.), (2016), Shadow Banking in China: An Opportunity for Financial Reform, Wiley & Sons, Hoboken.
- 181.
See Thompson Reuters/RMBISA, (2014), ibid., p. 9.
- 182.
See further: Y. Altunbas, et al. (2011), Bank Risk during The Financial Crisis – Do Business Models Better?, ECB Working Paper Series Nr. 1394; K. Chen, (2013), Loans to Local Government Financing Vehicles (LGFV) Pose Risks to Chinese Banks, Moody’s Investors Service, Credit Suisse Economics Research (2013), China: Shadow Banking – Road to Heightened Risks, Working Paper; L. Fung, and D. Wang, (2011), Unmasking the Shadow Banking System – Shadow Banking Exposure less than Feared and More Than Priced In; W. Kurtz, (2013), Country Risk – China’s Economy: New Warning Signs, Pragmatic Capitalism, Working Paper; C. Li, (2013), Shadow Banking in China: Expanding Scale. Evolving Structure, Federal Reserve Bank of San Francisco – Asia Focus; Moody’s Investors Service (2013), Risk to China’s Lender from Shadow Banking: Frequently Asked Questions.
- 183.
T. Jingi, (2013), China Starting to Regulate Shadow Banking, Nomura Research, Iakyara Vol. 181, November 11.
- 184.
S. Gao, (2015), Seeing Gray in a Black-and-White Legal World: Financial Repression, Adaptive Efficiency, and Shadow Banking in China, Texas International Law Journal, Vol. 50, Issue 1, pp. 95–142. Gao provides an excellent overview of the history of the root causes of SB in China and the different barriers to entry China’s financial repression has created.
- 185.
K.S. Tsai, (2014), The Political Economy of State Capitalism and Shadow Banking in China, HKUST IEMS Working Paper No. 2015–25, May, p. 41.
- 186.
S. Gao, (2015), ibid., p. 141.
- 187.
A.M. Wiegelmann and H.-G. Petersen, (2013), New Institutional Economics Perspective on Credit Transformation in China’s Financial System, May, Working Paper, mimeo.
- 188.
See also: FSB, (2015), ibid., pp. 37–41; also: A. Sheng et al., (2015), Bringing Light Upon the Shadow Bank. A Review of the Chinese Shadow Banking Sector, Fung Global Institute, Oliver Wyman, pp. 23–25.
- 189.
For example, S.J. Tong, (2013), Shadow Banking System in China—Origin, Uniqueness and Governmental Responses, Journal of International Banking Law and Regulation, Issue 1, pp. 20–26.
- 190.
E. Sekine, (2015), Reforming China’s Financial Markets: The Problems of Shadow Banking and Non-performing Loans, Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol. 11, No. 1, March 2015, pp. 93–139. Also: S.L. Schwarcz, (2013), Shadow banking, Financial Risk, and Regulation in China and Other Developing Countries, The Global Economic Governance Program, University of Oxford. He concludes, ‘Any such regulation, however, should attempt to strike a balance between reducing that risk and preserving shadow banking as an important channel of alternative funding to developing economies, particularly in the face of significant retrenchment by large banks that had dominated the credit supply.’
- 191.
I. Kaminska, (2015), China Has a Moral Hazard Problem, FT Alphaville, Financial Times, August 18.
- 192.
D. Anzoategui et al., (2015), Financial Distortions in China: A General Equilibrium Approach, IMF Working Paper Nr. WP/15/274.
- 193.
E. Perry and F. Weltewitz, (2015), Wealth Management Products in China, Reserve Bank of Australia, Bulletin June, pp. 59.
- 194.
Trust companies are financial institutions that manage assets and make investments on behalf of clients.
- 195.
See in detail E. Perry and F. Weltewitz, (2015), ibid., pp. 60–61; also see: J. Bedford and A. Rothman, (2013), China WMPs: Assessing the Risk, CLSA Speaker Series Report, 6 May; Y. Hu, (2014), Day of Reckoning for China Trusts, Haitong International Research Report, 25 July.
- 196.
See for more granular data sets: D. Tao and W. Deng, (2015), China: Trust Funds and Shadow Banking, Credit Suisse Economic Research, February 17.
- 197.
See for a specification of the product groups at risk: E. Perry and F. Weltewitz, (2015), ibid., pp. 61–62.
- 198.
E. Perry and F. Weltewitz, (2015), ibid., pp. 62–63.
- 199.
E. Perry and F. Weltewitz, (2015), ibid., pp. 63–66.
- 200.
D. Awrey, (2015), Law and Finance in the Chinese Shadow Banking System, Cornell International Law Journal, Vol. 48, Issue 1, pp. 3–49, in particular pp. 21–45 for the WMP analysis.
- 201.
See for a good visualization: W. Hou, et al., (2014), Chinese Banks – Initiating Coverage; Deleveraging, De-risking and (Finally) Diverging?, Sanford Bernstein Research, September 16, exhibit p. 34.
- 202.
D. Elliott et al., (2015), Shadow Banking in China: a Primer, Economic Studies at Brooking, March, pp. 14–16.
- 203.
Although much depends on the definition and measurement criteria: D. Elliott et al., (2015), ibid., pp. 17 and 21.
- 204.
See for a comparison between the Chinese and US shadow banking system: T.V. Dang et al., (2014), Chinese Shadow Banking: Bank-Centric Misperceptions, Hong Kong Institute for Monetary Research, Working Paper Nr. 22/2014, pp. 9–12. The similarities are mainly to be found in regulatory arbitrage and the causes of financial repression. The difference is largely built around the already indicated ‘US market-based versus Chinese Ban-based system’ (p. 11). An updated version of the paper was released in 2015; see: T.V. Dang et al., (2015), Shadow Banking Modes: The Chinese Versus US System, Working Paper, December, mimeo. In the latter paper they employ the concept of information sensitivity to model implicit credit guarantees , asymmetric perception of credit guarantees and the role of the government, which was absent in previous working papers.
- 205.
T.V. Dang et al., (2015), ibid., p. 3.
- 206.
See for an historical institutional analysis of the Chinese (shadow) banking sector: T.V. Dang et al., (2015), ibid., pp. 4–8.
- 207.
Z. Song, et al. (2009), Growing like China, American Economic Review, Vol. 101, pp. 196–233.
- 208.
See for a review of the History of the Financial Systems reform in China: T.V. Dang et al., (2014), Chinese Shadow Banking: Bank-Centric Misperceptions, Hong Kong Institute for Monetary Research, Working Paper Nr. 22/2014, pp. 4–5.
- 209.
T.V. Dang et al., (2014), ibid., p. 6 and T.V. Dang et al., (2015), ibid., pp. 8–10. Dang et al. Already the concept of information sensitivity already in 2013: T.V. Dang, et al., (2013), Ignorance, Debt and Financial Crises, Working Paper, mimeo; T.V. Dang, (2013), The Information Sensitivity of a Security, Working Paper, mimeo.
- 210.
T.V. Dang et al., (2014), ibid., p. 3.
- 211.
T.V. Dang et al., (2014), ibid., pp. 6–8. A. Sheng et al., (2015), Bringing Light Upon the Shadow Bank. A Review of the Chinese Shadow Banking Sector, Fung Global Institute, Oliver Wyman, pp. 8–10.
- 212.
Structuring wealth management products allows them to avoid the deposit ceiling regulation.
- 213.
G. Plantin, (2014), Shadow Banking and Bank Capital Regulations, HKIMR Working Paper Nr. 32/2014. See for a quantification of financial repression in China and the impact of monetary policy on shadow banking in China: M. Funke et al., (2015), Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control, Bank of Finland Discussion papers, Nr. 2015/9. See in a broader monetary perspective: R. Nuutilainen, (2015), Contemporary Monetary Policy in China: A Move Towards Price-Based Policy?, Bank of Finland Discussion papers, Nr. 2015/10.
- 214.
X. Zhang, (2012), China Monetary Policy, China Financial Press, Beijing and X. Zhang, (2013), Shadow Banking and Financial Crisis. China Reform, 2013/8 (in Chinese).
- 215.
T.V. Dang et al., (2014), ibid., p. 9.
- 216.
T.V. Dang et al., (2013), Ignorance, Debt and Financial Crises, Working Paper.
- 217.
T.V. Dang et al., (2014), ibid., p. 13. See also: T.V. Dang, et al., (2014), Banks as Secret Keepers, NBER Working Paper Nr. 20255.
- 218.
T.V. Dang et al., (2014), ibid., p. 17.
- 219.
T.V. Dang et al., (2014), Chinese Shadow Banking: Bank-Centric Misperceptions, Hong Kong Institute for Monetary Research, Working Paper Nr. 22/2014, pp. 2–3.
- 220.
T.V. Dang et al., (2015), ibid., pp. 18–21.
- 221.
See also: S. Chassang, and C. Zehnder, (2014), Rewards and Punishments: Informal Contracting Through Social Preferences, Working Paper, mimeo.
- 222.
T.V. Dang et al., (2015), ibid., pp. 21–25.
- 223.
See, for example, L. A. Górnicka, (2015), Shadow Banking and Traditional Bank Lending: the Role of Implicit Guarantees, UvA/Tinbergen Institute Working Paper, October, mimeo.
- 224.
See for a historical write-up of the Chinese securitization market: B. Buchanan, (2015), Securitization in China – Déjà Vu?, Journal of Structured Finance, Vol 21, Issue 3, pp. 36–50.
- 225.
See for a detailed volume analysis over the years: A. Rutledge, (2015), Who Will Take the Lead in Shaping China’s Securitization Market Model, SWIFT Institute Working Paper Nr. 2014/3, September 23, p. 3.
- 226.
Clifford Chance, (2015), Shadow Banking and Recent Regulatory Developments in China, January, p. 7.
- 227.
See for a volume analysis: A. Rutledge, (2015), Who Will Take the Lead in Shaping China’s Securitization Market Model, SWIFT Institute Working Paper Nr. 2014/3, September 23, pp. 10–12. The collateral is divided into six categories: NPLs, RMBS, collateralized loan obligations (CLO), credit card ABS, automobile loan ABS and light equipment lease ABS, with the CLOs accounting for 75% of the volume in collateral.
- 228.
The models are known as respectively the CBRC and CSRC model.
- 229.
Neither the ‘special purpose trust’ under the CBRC scheme nor the ‘special scheme’ under the CSRC scheme constitutes an independent legal entity with separate legal personality. See for a full write-up of the technicalities of both systems: J.H. Chen and L. Haiping, (2015), Securitization in China—Overview and Issues. Can China Develop a Viable Cross-Border Securitization Market, pp. 1–2 and A. Rutledge, (2015), Who Will Take the Lead in Shaping China’s Securitization Market Model, SWIFT Institute Working Paper Nr. 2014/3, September 23, pp. 9–14.
- 230.
The 2005 and 2013 regulations relied on a principal-agency entrustment concept contained in the PRC Civil Law (enacted April 1986), whereas the 2014 regulations are grounded on the PRC Securities Investment Funds Law (enacted December 2012 and made effective June 2013), which in turn incorporates the Trust Law.
- 231.
J.H. Chen and L. Haiping, (2015), ibid., pp. 2–3.
- 232.
In detail: J.H. Chen and L. Haiping, (2015), ibid., pp. 4–11.
- 233.
F. Law, (2015), China Becomes Asia’s Biggest Securitization Market, WSJ, September 24.
- 234.
Chinadaily, (2019), Securitization Provides growing Debt Funding to Chinese Economy, March 29, chinadaily.com.cn
- 235.
Clifford Chance, (2015), ibid., pp. 8–9. Also: F. Law, (2015), China Becomes Asia’s Biggest Securitization Market, WSJ, September 24.
- 236.
See J. Hu, (2013), SME Financing through Securitizations in China: Global Perspectives, Prepared solely for Harvard US-China Financial System Symposium, August.
- 237.
See J. Hu, (2013), ibid., pp. 10 and 12.
- 238.
See in detail: J. Hu, (2013), ibid., pp. 4–5. For a comparison between the Indian and Chinese Shadow banking market: D. Sherpa, (2013), Shadow Banking in India and China Causes and Consequences, Economic and Political Weekly, Vol. 48, Nr. 43, pp. 113–122.
- 239.
See for some illustrative recent examples: and A. Rutledge, (2015), Who Will Take the Lead in Shaping China’s Securitization Market Model, SWIFT Institute Working Paper Nr. 2014/3, September 23, pp. 15–17. The Chinese securitization market is a highly domestic affair (pp. 17–21).
- 240.
Which makes at least one party better off economically without increasing risk to the other: (1) the investor is better off bearing the risk based on its own capital management strategy; or (2) the borrower has locked into a cost of funds that is lower than the on-balance sheet cost (p. 22).
- 241.
A. Rutledge, (2015), Who Will Take the Lead in Shaping China’s Securitization Market Model, SWIFT Institute Working Paper Nr. 2014/3, September 23, pp. 21–27 and 32–33.
- 242.
A. Rutledge, (2015), ibid., p. 21.
- 243.
A. Rutledge, (2015), ibid., p. 23.
- 244.
A. Rutledge, (2015), ibid., p. 24.
- 245.
A. Rutledge, (2015), ibid., p. 27.
- 246.
See for a localized analysis of the three categories (true sale/funding arbitrage, pricing/capital arbitrage and benchmark arbitrage): A. Rutledge, (2015), ibid., p. 26–2
- 247.
J. Li and Y. Xue, (2014), Systemic Risk in Chinese Shadow Banking Systems: Risk Contagion Mechanism, Influence and Control, Journal of Quantitative and Technical Economics, Vol. 31, Issue 8, pp. 117–130.
- 248.
S. Hsu et al., (2014), Shadow Banking and Systemic Risk in China, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Nr. 349, May.
- 249.
They use a Markov model that asserts that shadow banking risk contagion is a dynamic ongoing process that can be regarded as a series of time intervals. Systemic risk is measured by how many defaults occur in the whole system as a consequence of potential contagion. See for set-up of the model (pp. 8–9).
- 250.
S. Hsu et al., (2014), ibid., pp. 15–16.
- 251.
See for the initial position: J. Li and S. Hsu, (2013), Shadow Banking in China: Institutional Risk, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Nr. 334, August.
- 252.
Q. Huang et al., (2015), Analyzing Systemic Risk in the Chinese Banking System, CESifo Working Paper Nr. 5513, September. See for other aspects of the Chinese systemic risk patterns in the SB and overall banking system: (1) Y. Chen, et al., (2014), Domestic Systemically Important Banks: A Quantitative Analysis for the Chinese Banking System. Mathematical Problems in Engineering, Working Paper, mimeo; (2) Y. Dong, et al., (2014), Evaluating the Performance of Chinese Commercial Banks: A Comparative Analysis of Different Types of Banks, Working Paper, mimeo; (3) J.P. Fenech, et al., (2014), Can the Chinese Banking System Continue to Grow Without Sacrificing Loan Quality? Journal of International Financial Markets, Institutions and Money, Vol. 31, pp. 315–330; and (4) Y. Wang, Y., et al., (2015), Estimating the Systemic Risk of China’s Banking Industries based on Merton Model, Applied Mathematics & Information Sciences, Vol. 9, Issue 2, pp. 957–964.
- 253.
A. Maharani, (2015), Chinese Shadow Banking Institutions: Understanding Factors Contributing to the Systemic Risks of Trusts and Investment Corporations, Wharton Research Scholars Journal Working Paper Nr. 4–2015.
- 254.
S. Hsu and J. Li, (2015), The Rise and Fall of Shadow Banking in China, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Nr. 375, February, pp. 5–6.
- 255.
Z. Hao, a Shanghai-based economist at Australia and New Zealand Banking Group Ltd. in J. Luo and C. Somayaji, (2014), China’s Cabinet Imposes New Rules in Shadow Banking Fight, 7 January 2014, Bloomberg.
- 256.
National Audit Office data.
- 257.
Banks and other financial institutions have offered wealth management products, off-balance sheet quasi-savings vehicles, to retain depositors who have been moving money out of the banking system for higher returns. The value of such wealth products stood at RMB 9.1 trillion at the end of June 2013, according to the China Banking Regulatory Commission; source ibid., note i).
- 258.
Bank lending dropped to 57% of direct and contingent liabilities as of 30 June from 79% at the end of 2010, while bonds rose to 10% from 7%, National Audit Office data show.
- 259.
Tang Jianwei, a Shanghai-based economist at Bank of Communications Co. in H. Sun and S. Hendry, Shadow Banking Risks Exposed by Local Debt Audit, 6 January 2014, Bloomberg.
- 260.
China’s borrowing spree since 2008 has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades.
- 261.
Ibid., note v.
- 262.
Total trust loans outstanding early 2014 were valued at RMB 4.62 trillion.
- 263.
S. Ho and P. Ran, (2014), Citigroup Inc. Analyst Report, January 3.
- 264.
See further: Bloomberg News, (2012), China’s Ghost Towns Highlight Shadow Banking Risk, November 20.
- 265.
Source: Xinhua News Agency reported in November 2013. That compares with the People’s Bank of China’s 6% benchmark one-year lending rate.
- 266.
Source: China Trustee Association. About 26% of their proceeds were invested in infrastructure projects.
- 267.
See further and for an overview of projects that were downgraded: M. Zhang, (2013), China’s local government financing vehicles: 7 things you should know about China’s local debt bomb, International Business Times, September 27.
- 268.
Although ‘informal lenders’ charge about 24–30% annually for their money, demand remains virtually unlimited. Obviously, one cannot defend a USD 5 trillion industry referring to a couple of (successful) examples; truth of the matters is that there is less leverage in the informal shadow banking part and losses are absorbed by the entrepreneur without affecting the taxpayer. J. Zhang, author of the book Inside China’s Shadow Banking: The Next Subprime Crisis? Enrich Professional Publishing Inc. (2013) argues: ‘[s]hadow banking has flourished in China for one simple reason: financial repression. By keeping interest rates artificially low, authorities have forced savers to search for more lucrative financial products. By favoring banks — which, in turn, favor state-owned or well-connected private-sector companies with loans — they have forced small enterprises to seek out people like me (i.e. shadow bankers). Meanwhile, projects that might look sketchy at 9% interest rates suddenly look feasible at 6%. Under such conditions, traditional banks have steadily lowered their lending standards — from prime loans to subprime and then to simply silly loans. Sound familiar? That’s how the 2008 financial crisis began, too. Leaders are right to worry about the possibility of a banking crisis in China. But instead of focusing their ire on shadow bankers, they should raise benchmark interest rates in order to reduce the amount of credit flowing to dodgy loans through the formal banking sector. That is luckily enough what is happening in 2014.’
- 269.
J. Zhang, (2013), The True Confessions of a True Shadow Banker, Financial Post, 9 July 2013.
- 270.
S. Hsu and J. Li, (2015), The Rise and Fall of Shadow Banking in China, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Nr. 375, February, pp. 12–15.
- 271.
In contrast to the rest of the world and, for example, the US, see S. Hsu and J. Li, (2014), Shadow Banking Systems in the U.S. and China. Chapter in ‘Challenges to Financial Stability: Perspectives, Models and Policy’ (ed. R. Karkowska), ASERS Publishing and S. Hsu et al., (2013), Shadow Banking and Systemic Risk in Europe and China, CITYPERC Working Paper Nr. 2013/2.
- 272.
D. Tao and W. Deng, (2015), China: Trust Funds and Shadow Banking, Credit Suisse Economic Research, February 17, pp. 19–20.
- 273.
CBRC (China Banking Regulatory Commission), (2014), The Guidance on Risk Supervision to Trust Companies. April 8. In that lists belongs as well: CBRC’s ‘Notice on Regulating Commercial Banking Interbank Business’ (document Nr. 140, May 2014). Discipline on the interbank market began in June 2013, when the PBOC engineered a liquidity squeeze that briefly drove overnight interest rates to nearly 30%. One of the main purposes of this exercise was to curb the enthusiasm of smaller banks that had been borrowing heavily on the interbank market to fund higher-risk lending activity, often routed through shadow banking, D. Elliott et al., (2015), Shadow Banking in China: A Primer, Economic Studies at Brooking, March, p. 22.
- 274.
See for a full mapping of regulatory initiatives taken by the Chinese government: D. Tao and W. Deng, (2015), China: Trust Funds and Shadow Banking, Credit Suisse Economic Research, February 17, pp. 33–35. For an evaluation: D. Richardson et al., (2015), Shedding Light on China’s Massive Shadow Banking Market: Regulations: for Better or for Worse, The Banking Law Journal, January, pp. 27–34.
- 275.
So argue that this is due to the regulatory framework in China and the way the SB segment has been built up. See for a comparative analysis of the Chinese regulatory initiatives in recent years with the regulatory reform agenda and implementation in the West: R.H. Huang, (2015), The Regulation of Shadow Banking in China: International and Comparative Perspectives, Banking and Finance Law Review, Vol. 30, pp. 481 ff., in particular pp. 488–502. Given the intertwining between the SB and regulated banking sector and the fact that they originate, structure and distribute as well as share risk over their joint platforms, an entity- or even activity-based approach comes with many complications. It refers to the complicated institutional setting that created the Chinese SB to begin with. As Huang indicates ‘In short, there is a mismatch between China’s regulatory structure and the underlying market it regulates, which has affected the efficacy of the regulation by creating regulatory inconsistency, gaps and overlaps’ (p. 491).
- 276.
J. Gruin, (2014), Asset or Liability? The Role of the Financial System in the Political Economy of China’s Rebalancing, Journal of Current Chinese Affairs, Vol. 42, Issue 2, pp. 73–104.
- 277.
Y. Li, (2013), Don’t Regulate Shadow Banking in a Rude Way, [in Chinese], China Securities Journal, July 19. Q. Yan and Li Jianhua, (2014), China’s Shadow Banking System and its Regulation, [in Chinese], China Renmin University Press, Beijing, China.
- 278.
The FSB reminded China of that in their latest peer review 2015 (supra); also: Z. Liansheng, (2015), The Shadow Banking System of China and International Regulatory Cooperation, New Thinking and the New G20 Series, Working Paper Nr. 6, March, pp. 5–6.
- 279.
R. Nuutilainen, (2015), Contemporary Monetary Policy in China: A Move Towards Price-Based Policy? BOFIT Discussion Papers Nr. 10, Helsinki.
- 280.
For example, a pertinent question related to the impact on the SB segment in case of an interest rate liberalization, how it will feed through and impact the SB infrastructure: see, for example, M. Funke et al., (2015), Monetary Policy Transmission in China: A DSGE Model with Parallel Shadow Banking and Interest Rate Control, BOFIT Discussion Papers Nr. 9, Helsinki (was also released as HK Monetary Authority Working Paper Nr. 12/2015, May). For reserve requirement changes and their impact, see Z. Fungáčová et al., (2015), Reserve Requirements and the Bank Lending Channel in China, BOFIT Discussion Papers Nr. 26, Helsinki.
- 281.
Entering China’s onshore fixed-income market is a complicated process. The initial license for a renminbi-qualified foreign institutional investor (RQFII) quota gives access only to the small pool of bonds traded on exchanges. Trading in the much larger interbank bond (IBB) market requires a further application for permission to the People’s Bank of China; see: S. Greene, (2015), Chinese Bonds Lure Foreign Fund Managers, Financial Times, December 6.
- 282.
D. Elliott et al., (2015), Shadow Banking in China: a Primer, Economic Studies at Brooking, March, p. 1.
- 283.
H. Wang et al., (2015), Shadow Banking: China’s Dual-Track Interest Rate Liberalization, Working Paper, May, mimeo.
- 284.
D. Tao and W. Deng, (2015), China: Trust Funds and Shadow Banking, Credit Suisse Economic Research, February 17, pp. 28–31.
- 285.
K. Hachem and Z. M. Song, (2015), The Rise of China’s Shadow Banking System, Chicago Booth School of Business Working Paper, January, pp. 3–8.
- 286.
Higher interbank rates discourage cap-constrained banks from expanding their off-balance sheet activities to evade liquidity standards (ratios drop).
- 287.
K. Hachem and Z. M. Song, (2015), ibid., pp. 3–4.
- 288.
Which is again on the rise in 2015: Bloomberg Business, (2015), China Credit Growth Jumps as Shadow Banking Comes Back, Bloomberg News January 15, via bloomberg.com
- 289.
K. Hachem and Z. M. Song, (2015), ibid., p. 4.
- 290.
K. Hachem and Z. M. Song, (2015), ibid., pp. 4–5.
- 291.
D.J. Elliott et al., (2015), Reforming Shadow Banking in China, The Brooking Institute Economic Studies, May,
- 292.
See in detail the excellent overview in D.J. Elliott et al., (2015), ibid., pp. 6–12. And the strategy options for implementation pp. 12–16.
- 293.
K.S. Tsai, (2014), The Political Economy of State Capitalism and Shadow Banking in China, HKUST IEMS Working Paper No. 2015–25, May.
- 294.
K.S. Tsai, (2014), ibid., pp. 11–12.
- 295.
K.S. Tsai, (2014), ibid., pp. 10–11.
- 296.
K.S. Tsai, (2014), ibid., p. 20. Also see: Cindy Li, (2013), Shadow Banking in China; Expanding Scale, Evolving Structure, Asia Focus, Federal Reserve Bank of San Francisco, April.
- 297.
K.S. Tsai, (2014), ibid., p. 27.
- 298.
K.S. Tsai, (2014), ibid., pp. 27–29. F. Allen, et al. (2005), Law, Finance, and Economic Growth in China. Journal of Financial Economics, Vol. 77, Issue 1, pp. 57–116; Y.S. Huang, (2008), Capitalism with Chinese characteristics, Cambridge University Press, New York; S.X. Jiang, (2009), The Evolution of Informal Finance in China and Its Prospects. In J. J. Li and S. Hsu (Eds.), Informal Finance in China: American and Chinese Perspectives, Oxford University Press, New York.
- 299.
FSB, (2015), Global Shadow Banking Monitoring Report 2015, via fsb.org
- 300.
C. Lo, (2015), Chi Time: Revisiting the Systemic Risk of China’s Shadow Banking, BNPP Report, December 9, p. 3.
- 301.
See in detail: C. Feldman, (2017), Banks’ Role in China’s Shadow Banking System, Working Paper, December.
- 302.
See for an overview of the regulatory space and recent market trends in China: King Wood Mallesons, (2018), State of Securitization in China, in ASIFMS Securitisation in China 2018, pp. 16–52. Other interesting related securitization topics include the ratings framework (pp. 88–93) and taxation issues (pp. 94–98).
- 303.
See in recent years: A. Sheng and Ng Chow Soon, (2016), Shadow Banking in China: An Opportunity for Financial Reform, Wiley, Surrey; A. Collier, (2017), Shadow Banking and the Rise of Capitalism in China, Palgrave Macmillan, Basingstoke; S. Wei, (2016), Shadow Banking in China: Regulation and Policy, Edward Elgar Publishing, Cheltenham; M. Teter, (2017), Shadow Banking in China, CreateSpace Independent Publishing Platform; D. McMahon, (2018), China’s Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle, Houghton Mifflin Harcourt, Boston, MA; Q. Yan and J. Li, (2016), Regulating China’s Shadow Banks, Routledge, Abingdon; N. Zhu, (2016), China’s Guaranteed Bubble: How Implicit Government Support Has Propelled China’s Economy While Creating Systemic Risk, McGraw-Hill Education, NY; T. Adrian and A.B. Ashcraft, (2016), Shadow Banking: A Review of the Literature, in ‘Banking Crises’, Palgrave Macmillan, Basingstoke, pp. 282–315; H. Wang et al., (2016), Shadow Banking: China’s Dual Track
Interest Rate Liberalization, mimeo; E. Sekine, (2015), Reforming China’s Financial Markets: the Problems of Shadow Banking and Non-Performing Loans, Policy Research Institute, MinFin Japan, Public Policy Review, Vol. 11, Nr. 1, March, pp. 93–139; G. Tian, et al., (2016), Systemic Risk in the Chinese Shadow Banking System: A Sector-Level Perspective, Emerging Markets Finance and Trade, Vol. 52, Issue 2, pp. 475–486; L. Sun, (2018), Financial Networks and Systemic Risk in China’s Banking System, MPRA Paper Nr. 90658, January 6; Huang et al. measure the systemic risk in the Chinese banking sector through the conditional value at risk, the marginal expected shortfall, the systemic impact index and the vulnerability index. They find that these measures show different patterns, capturing different aspects of systemic risk of Chinese banks. However, rankings of banks based on these measures are significantly correlated. See in detail: Q. Huang et al., (2019), Analysing Systemic Risk in the Chinese Banking System Pacific Economic Review, Vol. 24, Issue 2, pp. 348–372; M. Lindgren, (2018), Regulating the Shadow Banking System in China, University of Chicago Law School, International Immersion Program Papers Nr. 78, March.
- 304.
T. Ehlers et al., (2018), Mapping Shadow Banking in China: Structure and Dynamics, BIS Working Paper Nr. 701, February, p. 4.
- 305.
See also on the specifics of the China shadow banking market: W. Shen, (2018), Understanding Shadow Banking in the Chinese Context: Shadow Banking with Chinese Characteristics, in Research Handbook on Shadow Banking. Legal and Regulatory Aspects, I.H.-Y. Chiu and Iain MacNeil (eds.), Edward Elgar, Cheltenham, pp. 399–422. Some scholars observe a somewhat passive stance by Chinese regulators and supervisors when it comes to embracing and participating in the development global financial regulatory governance and a discontinuity of embracing global financial standards. See: P. Knaack and J. Gruin, (2017), From Shadow Banking to Digital Financial Inclusion: Regulatory Framework Contestation Between China and the FSB, GEG Working Paper Nr. 134, September.
- 306.
They dominate the shadow banking market, not only as originators of securitized debt. The market-based channels typical for a Western shadow banking system are near-absent in China. They are the most important linkage between borrowers and suppliers of credit in both the formal and informal (shadow) banking market. They also facilitate credit between nonfinancial firms as direct lending in that case is prohibited. In detail: T. Ehlers et al., (2018), ibid., p. 10. Also: D. Hinge, (2018), China’s Shadow Banking Market Dominated by Banks, February 12, via centralbanking.com; C. Li, (2016), The Changing Face of Shadow Banking in China, Federal Reserve Bank of San Francisco, Asia Focus, December; J. Du et al., Shadow Banking activities in Non-Financial Firms: Evidence from China, Working Paper, mimeo (also abbreviated and updated via voxchina.eu, 19 July 2017); J. Du et al., (2016), A Comparative Study of Shadow Banking Activities of Non-Financial Firms in Transition Economies, China Economic Review, Vol. 46, December, pp. S35–S49.
- 307.
K.S. Tsai, (2016), When Shadow Banking Can Be Productive: Financing Small and Medium Enterprises in China, The Journal of Development Studies, pp. 1–24, H. Löchel et al., (2016), The Funding of Small and Medium Companies by Shadow-Banks in China, Frankfurt School of Finance and Management Working Paper Series Nr. 220, March (including four case-studies), and Y. Lu et al., (2015), Shadow Banking and Firm Financing in China, International Review of Economics and Finance, Nr. 36, pp. 40–53. Private firms are often more productive than state-owned firms and credit provided often leads to economic gains. Also a lot of bank deposits have been re-routed into shadow banking products in search for higher yield given the low deposit rate ceiling in place until October 2015. Another reason is that access to bond markets is still in its infancy and the WMPs provide for an alternative, especially since they are marketed as safe. In detail: T. Ehlers et al., (2018), ibid., pp. 10–11.
- 308.
Those interlinkages exist between commercial banks and shadow banking vehicles but also with the bond market as significant proceeds of WMP are invested in the bond market. WMPs are an effective way for retail investors to invest in the bond markets as by law at least 75% of the underlying assets need to be standardized debt products (bonds, MMFs, etc.). The proceeds of WMPs are often channeled to trust companies or the wealth management branches of banks. Non-standardized products are ‘non-tradable debt securities such as trust and entrusted loans, direct equity stakes, equity-repos, and beneficial ownership rights including entrusted rights and TBRs’ (Ehling et al., [2018], ibid., p. 15–16). In both cases, these funds go off-balance sheet. But given the products invested in, interlinkages are reciprocal between the formal and informal part of the banking sector. It also leads to the fact that the bond market cannot provide for the diversification it normally does: F. De Fiori and H. Uhlig, (2015), Corporate Debt Structure and the Financial Crisis, Journal of Money, Credit and Banking, Vol. 47, Nr. 8, pp. 1571–1598. Bank assets often become investment receivables generating even tighter and opaque interlinkages. See for the process: T. Ehlers et al., (2018), ibid., pp. 11–12.
- 309.
Products are plain-vanilla and intermediation is a one- or two-step model. See for a comparison with the Western intermediation models: T. Adrian and A.B. Ashcraft, (2016), Shadow Banking: A Review of the Literature, in ‘Banking Crises’, Palgrave Macmillan, Basingstoke, pp. 282–315.
- 310.
In line with Western models, the shadow credit intermediation occurs without access to the central bank’s liquidity window or deposit insurance backstop , or without there being explicit or implicit guarantees in place. In the West that implicit assumption deals with G-SIBs assuming that in case of default the Fed will step in. In China, the distributing bank of WMPs is assumed to absorb the risk of default on any of the underlying instruments. There is no obligation to do so on the side of the banks but past bailouts, precedents and the assumed desire by the government to maintain a stable financial infrastructure create that implicit guarantee . And although that might be true for commercial banks, it definitely is not for lightly regulated credit guarantee companies. T. Ehlers et al., (2018), ibid., pp. 12–13.
- 311.
T. Ehlers et al., (2018), ibid., p. 1; also see: V. Acharya et al., (2019), In the Shadow of Banks: Wealth Management Products and Issuing Banks’ Risk in China, Working Paper, mimeo, June 4. Also WMPs are a regulatory arbitrage play. Acharya et al. comment: ‘[w]ith regulatory ceilings on both deposit rates and loan-to-deposit ratio (LDR), banks with higher LDRs issue more WMPs, especially when the gap between the market rate and deposit rate ceiling is high. This is consistent with the regulatory arbitrage hypothesis that banks offer deposit-like WMPs with higher yields to attract funding. The growth of WMPs imposes rollover risks for the issuers, as reflected by higher yields on new WMPs and their willingness to borrow at higher rates in the interbank market. Overall, the swift rise of shadow banking in China seems to have been triggered by the stimulus and has contributed to greater fragility of the financial system’.
- 312.
See, for example, F. Allen et al., (2019), Entrusted Loans: A Close Look at China’s Shadow Banking System, Journal of Financial Economics Vol. 133, Issue 1, July, pp. 18–41. Entrusted loans are a market response to credit shortages or tightening; K. Chen et al., (2016), What We Learn from China’s Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks’ Role in Entrusted Lending, NBER Working Paper Nr. 21890; K. Chen et al., (2017), The Nexus of Monetary Policy and Shadow Banking in China, NBER Working Paper Nr. 23377 (later on published in American Economic Review 2018, Vol. 108, Issue 12, pp. 3891–3936). They concluded that (1) in response to monetary policy tightening, non-state banks actively engaged in intermediating shadow banking products; (2) these banks, in sharp contrast to state banks, brought shadow banking products onto the balance sheet via risky investments; (3) bank loans and risky investment assets in the banking system respond in opposite directions to monetary policy tightening, which makes monetary policy less effective; Z. Chen, et al., (2017), The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes, mimeo; K.C. Hachem et al., (2016), Liquidity Regulation and Unintended Financial Transformation in China, NBER Working Papers, Nr. 21880; C. Li, (2016), The Changing Face of Shadow Banking in China, Federal Reserve Bank of San Francisco, Asia Focus, December; K. Mcloughlin and J. Meredith, (2017), The Rise of Chinese Money Market Funds, Reserve Bank of Australia Bulletin, March, pp. 75–84. Ruan assesses that entrusted lending is more prevalent and more profitable in cities where traditional bank loans grow slower. Entrusted lenders also appear to use existing cash rather than raise external finance to make the loans; see T. Ruan, (2018), The Economics of Shadow Banking: Lessons from Surrogate Intermediaries in China, NYU Stern Working Paper, January 30; W.R. Lam and J. Wang, (2018), China’s Local Government Bond Market, IMF Working Paper Nr. WP/18/219, September. They observe the rising relevance of local government finance and conclude that low liquidity, weak credit discipline and structural fiscal deficit in local governments have become more visible. Measures are taken: also P. Wingender, (2018), Intergovernmental Fiscal Reform in China, IMF Working Paper Nr. WP/18/88, April, and R.C. Mano and J. Zhang, (2018), China’s Rebalancing: Recent Progress, Prospects and Policies, IMF Working Paper Nr. WP/18/243, November. That evolution would definitely include a further integration into the global bond markets; see E. Cerutti and M. Obstfeld, China’s Bond Market and Global Financial Markets, IMF Working Paper Nr. WP/18/253, October.
- 313.
For example, Moody’s ‘Quarterly China Shadow Banking Monitor’ could be a good recurring reference document for actual data. For a general overview, see M. Gupta and M. Caporin, (2018), The Evolution of Shadow Banking System in Emerging Economies: The Role of Entrusted Loans in China’s Capital Market, Working Paper, May 17, mimeo.
- 314.
The barrage of daily news regarding the Chinese shadow banking sector is immense, but equally swiftly outdated. I artificially limited myself from providing a comprehensive ‘data’ overview as that would prove to be not useful by the time this manuscript goes to press or the years thereafter.
- 315.
See, for example, FSB, (2018), Global Shadow Banking Monitoring Report 2017, 5 March, where it was reported that of the USD 45.2 trillion in global shadow banking assets linked to credit that could pose systematic risks, the FSB attributed USD 7 trillion to Chinese companies. The sudden increase in bank credit provided by commercial banks leads to the conclusion that shadow banking, rather than the real economy, is being fed: S. Hsu, (2018), Recent Surge in Chinese Bank Credit Reflects Necessary Crackdown On Shadow Banking, February 20, via forbes.com. or D. Weiland, (2018), China Shadow Bank Clampdown Eyes $2tn of Entrusted Loans, Financial Times, January 8; A. Monahan, (2018), Cracks Are Showing in China’s Shadow Banking Industry, Bloomberg, January 24, (via Bloomberg.com).
- 316.
M. Chui and C. Upper, (2017), Recent Developments in Chinese Shadow Banking, SUERF Policy Note Nr. 20, November.
- 317.
J. Plenders, (2018), Beware Threat of Low-Quality Debt and Opaque Shadow Banks, Financial Times, March 7.
- 318.
See for an analysis of the influence of China’s shadow banking system on the stability of the financial system: B. Liu et al., (2016), An Empirical Study About the Influence of China’s Shadow Banking on the Stability of the Financial System, International Journal of Economics and Finance, Vol. 8, Nr. 4, pp. 104–112; more in general; M. Zheng and W. Xiong, (2018), Risks in China’s Financial System, Bank of Finland, BOFIT Discussion Papers Nr. 1, January 15.
- 319.
Although earlier in March 2018, the government indicated it would stop setting the M2 growth rate (for the first time in nine years); see the 2017 Government Work Report (via gov.cn)
- 320.
See for an alternative: K. Hachem and Z.M. Song, (2015), The Rise of China’s Shadow Banking System, updated 2017, Chicago Booth Working Paper, mimeo; Z.M. Song and W. Xiong, (2018), Risks in China’s Financial System, NBER Working Paper Nr. 24230, January.
- 321.
The come in two segments: (1) the principal- or return-guaranteed WMP (similar to certificates of deposits) where the issuing bank absorbs the default risk and the product is subject to normal banking regulation; and (2) non-principal-guaranteed WMPs with no implicit or explicit guarantee. The bank acts as an asset manager and default risk is passed on to the customer. The latter segment is the largest with a typical coverage of 80% of the market. Both categories operate as closed-ended funds. S. Wei, (2015), Wealth Management Products in the Context of China’s Shadow Banking: Systemic Risks, Consumer Protection and Regulatory Instruments, Asia Pacific Law Review, Vol. 23, Issue 1, pp. 91–123.
- 322.
See in detail: T. Ehlers et al., (2018), ibid., pp. 13–17.
- 323.
People’s Bank of China (i.e. China’s central bank).
- 324.
Moody’s, (2017), China’s New Guidelines on Asset Management Products Are Credit Positive, November 27. They also agreed to implement (11 January 2018) the already discussed BCBS controlling large exposures in order to further curtail bank risk.
- 325.
T. Ehlers et al., (2018), ibid., p. 14.
- 326.
The joint-stock banks typically have a much smaller deposit base and a greater reliance on interbank markets and bond issuance for funding than the large banks. Smaller city commercial banks as well as rural banks have significantly expanded their WMP issuance activity over time. T. Ehlers et al., (2018), ibid., p. 15.
- 327.
See regarding the pricing determinants of trust products: H. Park and S. Sohn, (2018), Pricing Determinants of Shadow Banking Products: Evidence from Chinese Collective Fund Trusts, Working Paper, January, mimeo. The implicit guarantee causes a wider default spread and increases the probability of the trust issues and decreases the trust spread, implying that the default risk strengthens investors’ demand for trust products. The consequence is that the price of the trust fund products is largely driven by credit market conditions.
- 328.
Trust companies generate leverage cycle dynamics by intermediating less regulated credit to the financial markets in China. Xu et al. find that the leverage factor constructed from trust companies can explain the (time-series and cross-sectional) asset returns. The bottom line is that the financial innovations created by shadow banks significantly amplify leverage in less sophisticated financial markets. This not only affects financial fragility, but also determines asset prices. See in detail: F. Xu et al., (2019), Shadow Banks, Leverage Risks, and Asset Prices, Working Paper, April 21, mimeo. Gruin and Knaack see WMPs and online lending as the latest stage of the Chinese Communist Party’s efforts to construct a more efficient and sustainable market economy while simultaneously preserving political supremacy and custodianship of macro-social development. See in detail: J. Gruin, (2019), Not Just Another Shadow Bank: Chinese Authoritarian Capitalism and the ‘Developmental’ Promise of Digital Financial Innovation, New Political Economy, online, https://doi.org/10.1080/13563467.2018.1562437, January 31. The difference in policy response is commensurate with the degree to which each financial sector meets the Party’s twin objectives of economic development and political control, they add. Also see: Wei, S. (2019). The Political Economy of China’s Shadow Banking. In E. Avgouleas and D. Donald (Eds.), The Political Economy of Financial Regulation (International Corporate Law and Financial Market Regulation), pp. 445–478, Cambridge, Cambridge University Press.
- 329.
See for the legal dynamics: L. Lu, (2017), Shadow Banking for Cash-Strapped Entrepreneurs: A Study of Private Lending Agreements under Chinese Contract Law, Journal of Business Law (2018), Sweet & Maxwell, Issue 3, pp. 216–229. Also: L. Lu, (2018), Black Swans and Grey Rhinos: Demystifying China’s Financial Risks and the Financial Regulatory Reform, Butterworths Journal of International Banking and Financial Law, Vol. 33, pp. 594–597.
- 330.
T. Ehlers et al., (2018), ibid., p. 16. Regarding the regulatory dimension for trust companies, see N. Zhu and J. Conrad, (2014), The People’s Republic of China: Knowledge Work on Shadow Banking–Trust Funds and Wealth Management Products, Consultant’s Report for Asian Development Bank.
- 331.
It requires more data and internal coordination. See M. Liao et al., (2016), China’s Financial Interlinkages and Implications for Inter-Agency Coordination, IMF Working Paper Nr. 16/181, August.
- 332.
T. Ehlers et al., (2018), ibid., pp. 18–19.
- 333.
Maturity transformation leads particularly to liquidity risk rather than interest rate risk. Drechsler et al. assessed that aggregate net interest margins have been near-constant over 1955–2013, despite substantial maturity mismatch and wide variation in interest rates. They explain the phenomenon through market power of banks. Market power allows banks to pay deposit rates that are low and therefore relatively insensitive to interest rate changes. Banks hedge these liabilities by investing in long-term assets, whose interest payments are also relatively insensitive to interest rate changes. See in detail: I. Drechsler et al., (2017), Banking on Deposits: Maturity Transformation Without Interest Rate Risk, NYU Stern Working Paper, March. Also see: R. Duchin et al., (2017), Precautionary Savings with Risky Assets: When Cash Is Not Cash, The Journal of Finance, Vol. 72, Issue 2, pp. 793–852; J. Luo, (2017), Shadow Banking, Interest Rate Marketization and Bank Risk-Taking: An Empirical Study of the 40 Commercial Banks in China, Journal of Financial Risk Management, Vol. 6, pp. 27–36. Raising either WMPs or expected losses (ELs) leads to a transfer of wealth from equity holders to the debt holders, and hence increases the deposit insurance liabilities. The multiple shadow banking activities of WMPs and ELs captured by scope equities may produce superior return performance for the bank. The results documented by Lin et al. provide an alternative explanation for the decline in bank interest margins, which better fits the narrative evidence on bank spread behavior under capital regulation in particular during a financial crisis. See in detail: J.-H. Lin et al., (2018), Bank Interest Margin, Multiple Shadow Banking Activities, and Capital Regulation, International Journal of Financial Studies, Vol. 6, pp. 63–83, July 3.
- 334.
P. Łasak, (2015), Regulatory Responses to the Chinese Shadow Banking Development, Jagiellonian Journal of Management, Vol. 1, Nr. 4, pp. 305–317.
- 335.
History and culture are decisive elements in the rise and nature of informal finance, also in China; see: J. Hu et al., (2017), History, Culture and the Rise of Informal Finance in China, Hong Kong Institute for Monetary Research Working Paper Nr. 12/2017, June.
- 336.
See for a recent comparative analysis: M. Ganguly and M. Ojo, (2018), Unregulated Financial Markets and the Shadow Banking Narrative: China, India and the United States, American Journal of Economics, Vol. 8, Issue 1, pp. 47–67. For a comparison of the different regulatory approach, see S. Gao and Q. Wang, (2014), Chasing the Shadow in Different Worlds: Shadow Banking and its Regulation in the U.S. And China, Manchester Journal of International Economic Law, Vol. 11, Issue 3, pp. 421–458. While financial reform has taken place in India, financially repressive policies still prevail in China. Although several regulatory measures have been adopted in India and China, the size of the shadow banking sector in these two countries remains underestimated, claim Arora and Zhang; R.U. Arora and Q. Zhang, (2019), Banking in the Shadows: A Comparative Study of China and India, Australian Economic History Review, Vol. 59, Issue 1, March, pp. 103–131.
- 337.
For example, the non-performing loan ratio or the loan-to-deposit (LTD) ratio. Although the latter was lifted in 2015, the product can still be used in case a bank is looking for ways to expand its loan book. See also: L. Li and A. Yavas, (2017), Land Share, Mortgage Default, and Loan-to-Value Ratio as a Macro-Prudential Policy Tool, Hong Kong Institute for Monetary Research Working Paper Nr. 10/2017, May.
- 338.
That transfer can take different forms. The transfer can be facilitated as a sale or the initial loan can be terminated and replaced by a new loan (or loans) coming from the trust company. Alternatively, the bank can arrange a new loan actually provided by the trust company. Direct loan transfers to trust companies are prohibited and so the initial transfer is often done as a WMP with the initial loan underlying.
- 339.
See in detail: Y. Lu, et al., (2015), Shadow Banking and Firm Financing in China, International Review of Economics and Finance, Nr. 36, pp. 40–53.
- 340.
T. Ehlers et al., (2018), ibid., p. 20. S. Seki, (2016), The Growing Problem of Excessive Debt in China. Estimating the Implied Non-Performing Loan Ratio and the Amount of Bad Loans, RIM Pacific Business and Industries, Vol. 16, Nr. 61, pp. 1–16.
- 341.
Often via online platforms (e.g. P2P platform). See in detail: C. Na et al., (2017), China’s P2P Lenders Now Required to Appoint Commercial Banks as Fund Custodians, online via caixingglobal.com, February 24. For how technology is shaping the Chinese shadow banking market, see: R.N. Lai and R. A. Van Order, (2017), Fintech Finance and Financial Fragility — Focusing on China, November 27, mimeo.
- 342.
The entrusted loan concept was discussed earlier in this chapter. Conceptually, the bank is in case of an entrusted loan a trustee (for a fee) collecting principal and interest but the ultimate credit risk sits with the provider of the funding (which can be virtually anyone). The model is driven by the fact that direct lending between nonfinancial firms is not allowed. See: F. Allen et al., (2017), Entrusted Loans: A Close Look at China’s Shadow Banking System, CEPR Discussion Paper Nr. 12864, April 16. They focus on fundamental and informational risks and consequent pricing of entrusted loans; C. Kaiji et al., (2017), What We Learn from China’s Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks’ Role in Entrusted Lending, NBER Working Paper Nr. 21890, January; Z. Chen et al., (2019), The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes, University of Chicago, Becker Friedman Institute for Economics Working Paper Nr. 29, providing a market-based view of the development of the shadow banking market in China after the 2012 RMB 4 trillion stimulus package; X. Li and J.-H. Lin, (2016), Shadow-Banking Entrusted Loan Management, Deposit Insurance Premium, and Capital Regulation, International Review of Economics and Finance, Vol. 41, pp. 98–109, January; Z. Song, (2017), Risks in China’s Financial System, Princeton University Working Paper, November, mimeo; Y. Liu, (2018), An Equilibrium Model of Entrusted Loans, University of Lausanne (IBF) Working Paper, May 29, mimeo.
- 343.
On 5 January 2018, the China Banking Regulatory Commission issued the ‘Notice about commercial banks’ management on entrusted-loans’ (Yinjianfa [2018] Nr. 2) to standardize the entrusted loans business by strictly tightening fund sources and usage of such funding. The Notice took immediate effect. In fact, it was based on draft guidelines that existed since 2015.
- 344.
Local public debt has crowded out private investments. See in detail: Y. Huang et al. (2019), Local Crowding Out in China, EIEF Working Papers Series Nr. 1707, Einaudi Institute for Economics and Finance (EIEF), revised February.
- 345.
See in detail for both models: P. He, (2018), China Tightens Entrusted-Loans of Commercial Banks, The Bank of Tokyo-Mitsubishi UFJ, News Focus Nr. 2, January 24, p. 1.
- 346.
P. He, (2018), ibid., p. 2.
- 347.
See for the current state of OTC derivatives in China: HKEC, (2017), OTC Clearing Solution for Mainland China’s Increasing Cross-Border Derivatives Trading, Research Report, November.
- 348.
See for stylized maps: T. Ehlers et al., (2018), T. Ehlers et al., (2018), Mapping Shadow Banking in China: Structure and Dynamics, BIS Working Paper Nr. 701, February, pp. 23–26.
- 349.
T. Ehlers et al., (2018), ibid., pp. 28–29; also see: N. M. Boyson, et al., (2016), Why Don’t All Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust-Preferred Securities, Review of Financial Studies, Vol. 29, pp. 1821–1859; G. Buchak et al., (2017), Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks, NBER Working Paper Series, Nr. 23288, October. For China in particular it has been observed that banks are using WMPs as vehicles for their regulatory arbitrage or window dressing behaviors. Cai et al. document that the WMPs’ maturity dates cluster toward the end of a month and then decrease significantly at the beginning of the following month as well as that a negative relationship was observed between a bank’s loan-to-deposit ratio (LDR). See in detail: J. Cai et al., (2016), Regulatory Arbitrage and Window-Dressing in the Shadow Banking Activities: Evidence from China’s Wealth Management Products, Global Research Unit Working Paper Nr. 2016–006; S. Gao, (2015), Seeing Gray in a Black-and-White Legal World: Financial Repression, Adaptive Efficiency, and Shadow Banking in China, Texas International Law Journal, Vol. 50, Nr. 1, pp. 95–143; N. Ding et al., (2019), Shadow Banking, Bank Ownership, and Bank Efficiency in China, Emerging Markets and Trade Journal, online, https://doi.org/10.1080/1540496X.2019.1579710, February 27.
- 350.
In extenso: T. Ehlers et al., (2018), ibid., pp. 27–30, and for a stylized write-up of the discussed shadow banking products, ibid., pp. 35–37.
- 351.
See ex ante on regulation: S.L. Schwarcz, (2016), Shadow banking, Financial Risk, and Regulation in China and Other Developing Countries, Duke School of Law Working Paper, November.
- 352.
It was argued that China’s rising shadow banking was inextricably linked to potential balance sheet risks in the banking system. See: K. Chen et al., (2016), What We Learn from China’s Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks’ Role in Entrusted Lending, Federal Reserve bank of Atlanta, Working paper Series Nr. 2016–1, January. A number of findings supported their view: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks’ exposure to balance sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance sheet risks into the balance sheet. See also the interesting overview of the relevant Chinese regulations in historical perspective: pp. 52–54. Also see: K. Hachem and Z.M. Song, (2015), The Rise of China’s Shadow Banking System, Working Paper, January, mimeo.
- 353.
It does not only crack down on a massive shadow banking segment but will over time also lead to credit allocation: Z. Yangpeng, (2018), China’s Ban on Entrusted Loans to Set to End a Popular Form of Shadow Financing, (via scmp.com), January 9. In the article Richard Xu argues, ‘Since the only channel for asset management plans to allocate funds to the end borrowers is via entrusted loans, the ban on using funds from the plans from brokers, fund management subsidiaries and private funds for entrusted loans will effectively put an end to the most popular structure for non-standardized credit assets.’ The question remains to what degree it will push some borrowers offshore, especially since the bond markets will also be impacted by this crackdown.
- 354.
Y. Tan, (2017), Competitions in Different Banking Markets and Shadow Banking: Evidence from China, University of Huddersfield Working Paper, October 20, mimeo (also published in the North American Journal of Economics and Finance, Vol. 42, pp. 89–106, 2017). Tan pioneers on the topic of competition between different banking segments (deposit market, loan market and non-interest income market) and shadow banking. She also analyzes the determinants of competition in different banking markets as well as the factors influencing the size of shadow banking in China. Her findings suggest that a larger volume of shadow banking leads to a decline in the level of competition in the Chinese deposit market, loan market and non-interest income market, while an increase in the level of competition in the loan market, deposit market and non-interest income market leads to an expansion of the shadow banking industry in China. Improving the performance of Chinese commercial banks is key, which is a challenge as most of them are state-owned banks. See for the overall competitive relationship between shadow banks and traditional banks: C. Shu, (2017), Banking Competition Revisited: Shadow Banks vs. Commercial Banks, Working Paper, June, mimeo; L. Jiang et al. (2016), Competition and Bank Opacity, HKIMR Working Paper Nr. 5, April.
- 355.
C. Xi and L. Xia, (2017), Shadow Banking in China: Then and Now, Shadow Banking in China: Then and Now, Journal of Banking and Finance Law and Practice, Vol. 28, pp. 146–157; see also the nice overview of all regulatory measures regarding the shadow banking market from 2010 to October 2016 (pp. 151–152).
- 356.
And obviously the 2012 RMB 4 trillion stimulus package. Although credit booms have some things in common across the globe, the complex nature and involvement of the different shadow banking agents and the combination of high savings, current account surplus, small external debt, and various policy buffers can help mitigate near-term risks. See also: S. Chen and J.S. Kang, (2018), Credit Booms – Is China Different?, IMF Working Paper Nr. WP/18/2, January. Regarding the contribution of China’s high savings, see H. He et al., (2018), China’s High Savings: Drivers, Prospects, and Policies, IMF Working Paper Nr. WP/18/277, December.
- 357.
In a broader context it can be argued that firm performance in China is driven by corporate governance, or the lack thereof: in detail: M. Molnar et al., (2017), Corporate Governance and Firm performance in China, OECD Economics Department Working Papers, Nr. 1421, ECO/WKP(2017)53, October 10.
- 358.
Which is what is suggested by: W. Maliszewski et al., (2016), Resolving China’s Corporate Debt Problem, IMF Working Paper Series, Nr. WP/16/203. Key elements should include, according to them, identifying companies in financial difficulties, proactively recognizing losses in the financial system, burden sharing, corporate restructuring and governance reform, hardening budget constraints and facilitating market entry.
- 359.
See for an attempted quantification and details: J. Caparusso and K. Yan, (2017), China: Financial System Vulnerabilities—Shadow Exposures, Funding, and Risk Transmission, China: Selected Issues––IMF Country
Report, July 14, pp. 17–23 and 26–32, as well as R. Lam et al., (2017), Resolving China Zombies: Tackling Debt and Raising Productivity, IMF Working Paper Series Nr. WP/17/266, November. Lam et al. do not only assess, qualify the vulnerabilities in the system and the crowding out of zombie firms, they particularly illustrate empirically the linkages between zombie firms and state-owned enterprises in contributing to corporate debt vulnerabilities and low productivity (pp. 8–10). They also analyze the effects of different restructuring options and the potential output gains from resolving these weak firms.
- 360.
See for past experiences in this field: D.A. Grigorian and F. Raei, (2016), Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession, IMF Working Paper Nr. WP/10/260; J. Daniels et al., (2016), Debt-Equity Conversions and NPL Securitization in China––Some Initial Considerations, IMF Technical Notes and Manuals 16/05, August.
- 361.
The reference to zombie firms in literature typically is to those whose liquidation value is greater than their value as a going concern, taking into account potential restructuring. For the Chinese government the qualification of a zombie banks is ‘firms that incur three years of losses, cannot meet environmental and technological standards, do not align with national industrial policies, and rely heavily on government or bank support to survive’. Alternatively used as a benchmark is ‘firms incurring persistent losses and with interest payment costs below market lending rates—a proxy for support from creditors or the government’. Zombie firms are not a typical Chinese issue. See: D. Andrews and F. Petroulakis, (2017), Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe, OECD Working Paper, ECO/WKP(2017)65, November 16 and M. A. McGowan et al., (2017), Insolvency Regimes, Zombie Firms and Capital Re-allocation, Economic Department Working Paper Nr. ECO/WKP(2017)31, June 28. For a stylized and comparative analysis of zombie banks, see: R. Lam et al., (2017), Resolving China Zombies: Tackling Debt and Raising Productivity, IMF Working Paper Series Nr. WP/17/266, November, p. 7.
- 362.
See in detail: W.R. Lam and A. Schipke (2017), State-Owned Enterprises Reforms, in Modernizing China: Investing in Soft Infrastructure, IMF Publishing; W. Leutert, (2016), Challenges Ahead in China’s Reform of State-Owned Enterprises, Asia Policy Issue 21, January, pp. 83–99; A. Batson, (2016), Villains or Victims? The Role of SOEs in China’s Economy, in The State Sector’s New Clothes, GaveKal China Economic Quarterly, No. 20/2, June 2016; W. Lam and A. Schipke, (2016), China’s Emerging State-Owned Enterprises (SOE) Reform
Strategy, China: Selected Issues––IMF Country Report 16/271; B. Naughton, (2016), State Enterprise Reform: Missing in Action. In The State Sector’s New Clothes: Will SOEs Save China’s Economy or Drag It Down, China Economic Quarterly, Vol. 20, Issue 2, June; N. Liack, (2017), Alternative Finance and Credit Sector Reforms: The Case of China, Bank of England Staff Working Papers Nr. 694, November.
- 363.
See for a full overview of measures taken and assessment: R. Lam et al., (2017), Resolving China Zombies: Tackling Debt and Raising Productivity, IMF Working Paper Series Nr. WP/17/266, November, pp. 13 ff.
- 364.
The most common industries to find them in are steel, aluminum, textile, automotive and so on.
- 365.
J. Huang et al., (2019), The Risk of Implicit Guarantees: Evidence from Shadow Banks in China, Working Paper, Mazy, mimeo. They focus on the qualitative and quantitative properties of implicit guarantees for shadow banking debt. They document that a bank extends stronger implicit guarantees to its shadow bank debt (i.e. wealth management products) when its reputation deteriorates. The key mechanism of the model is that as a bank’s reputation becomes worse, it has stronger incentives to send positive signals to the market, that is, to boost the realized returns of its shadow bank debt, although it is not obliged to do so. Their findings imply that riskier banks should have higher-risk weight for their off-balance sheet exposure because they are more tempted to offer implicit guarantees and take losses for their off-balance sheet operations.
- 366.
R. Lam et al., (2017), Resolving China Zombies: Tackling Debt and Raising Productivity, IMF Working Paper Series Nr. WP/17/266, November, p. 7; M. Jaskowski, (2015), Should Zombie Lending Always Be Prevented?, International Review of Economics & Finance, Issue 40, pp. 191–203. See for a Western analysis: R. Chami et al., (2016), What’s Different About Bank Holding Companies, Working Paper, December 5, mimeo.
- 367.
See most recently: Y. Tan, et al., (2017), The Crowding-Out Effect of Zombie Firms: Evidence from China’s Industrial Firms, Economic Research Journal (Jingjiyanjiu), Vol. 52, Nr. 5, pp. 175–188; G. Shen, et al., (2017), Zombie Firms and Over-Capacity in Chinese Manufacturing, China Economic Review, Elsevier, Vol. 44(C), pp. 327–342; W. Guo, et al., (2017), Zombie Firms and the Stimulating Policies: Evidence from China, mimeo.
- 368.
See regarding the relationship between misallocation and productivity: D. Restuccia, and R. Rogerson, (2013), Misallocation and Productivity, Review of Economic Dynamics, Vol. 1, Issue 16, pp. 1–10; also see: L.W. Cong et al., (2017), Credit Allocation Under Economic Stimulus: Evidence from China, Chicago Booth Research Paper Nr. 17–19, August.
- 369.
See most recently: L. Caliendo et al., (2017), Distortions and the Structure of the World Economy, NBER Working Paper Nr. 23332; H. Chen et al., (2017), To Guide or Not to Guide: Quantitative Monetary Policy Tools and Macro-Economic Dynamics in China, Hong Kong Institute for Monetary Research Working Paper Nr. 09/2017, May.
- 370.
See in extenso: H. Chen et al., (2017), Corporate Default Risk and Loan Pricing Behavior in China, Hong Kong Institute for Monetary Research Working Paper Nr. 22/2017, October.
- 371.
The complexity of the economic transformation China is undergoing will co-shape the future size and nature of their shadow banking landscape; see: G. Han, (2017), Structural Transformations and Its Implications for the Chinese Economy, Hong Kong Institute for Monetary Research Nr. 8/2017, April.
- 372.
I. Aldasoro et al., (2018), Early Warning Indicators of Banking Crises: Expanding the Family, BIS Quarterly Review, March, pp. 29–45.
- 373.
The credit-to-GDP gap measures the difference between the percentage of debt in an economy and its long-term trend.
- 374.
IMF, (2017), China—Financial System Stability Assessment, IMF Country Report Nr. 17/358, December 6, in particular pp. 29–33.
- 375.
B. Varga, (2017), Current Challenges Facing Chinese Financial Supervision and Methods of Handling These Challenges, Financial and Economic Review, Vol. 16. Special Issue, January 2017, p. 136.
- 376.
J. Bowman et al., (2018), Non-Bank Financing in China, Reserve Bank of Australia, Bulletin March, p. 12. They categorize the shadow banking market in five departments: trust loans, other shadow debt, entrusted loans, bank-accepted bills and alternative financing (pp. 6–7). See also for a write-up: X. Zhu, (2018), The Varying Shadow of China’s Banking System, University of Toronto, Working Paper Nr. 605, may 17. An provides interesting insights in a hidden segment of the SB market, that is, guaranteed off-balance sheet (consists of banker’s acceptance, letter of credit and letter of guarantee). He argues that the Desirability Lending Policy conducted by People’s Bank of China during the period 2011–2014 is the unique fundamental driving force, rather than traditional regulatory constraints, such as reserve requirement ratio and loan-to-deposit ratio. See in detail: P. An, (2018), Neglected Part of Shadow Banking in China International Review of Economics & Finance, Elsevier, Vol. 57(C), pp. 211–236.
- 377.
Interesting is the observation that it was after the deregulation wave in the financial industry that bank competition rose and new entrants into the space were those that have been extensively lending to inefficient state-owned enterprises that have implicit government guarantees. See H. Gao, et al. (2018), Rise of Bank Competition: Evidence from Banking Deregulation in China, Working Paper, April 16, mimeo. The Chinese style of shadow bank transforms risky corporate loans into interbank lending. Therefore, risky weight assets are underestimated resulting in bias of the observed high capital and liquidity measures. Moreover, the weights of the capital and liquidity measures are distorted. Bank regulators and shareholders should incorporate the effect of shadow bank into observed financial ratios in assessing the safety and soundness of the banking system claims C.-H. Shen et al., (2018), How Does Shadow Bank Affect Bank Ranking in China?, Emerging Markets Finance and Trade Journal, online, https://doi.org/10.1080/1540496X.2018.1530654, December 20.
- 378.
J. Du et al., (2016), Shadow Banking Activities in Non-Financial Firms: Evidence from China, Chinese University in Hong Kong Working Paper, mimeo. Key to this analysis is the linkage between financial liability and financial assets or the financial assets and fixed assets investment, which is different for a ‘borrow to lend’ firm and a ‘borrow to invest’ firm. Small private firms engage in the usual ‘borrow to invest’ activities while the large state-owned firms and less profitable firms are more involved in the ‘borrow to lend’ activities. Also see: Z. Tan, (2018), Liquidity Shocks and ‘Borrow to lend’ Shadow Banking Activities, HKIMR Working Paper Nr. 13 May, who also points at the liquidity shocks (like the one China experienced in 2013) that might result out of an increase of ‘borrow to lend’ activities and how liquidity shocks also contribute to the development of such shadow banking activities. Q. He, (2016), Who Gains from Credit Granted Between Firms? Evidence from Inter-corporate Loan Announcements Made in China, CFS Working Paper Series, Nr. 529, Center for Financial Studies, Goethe University. Entrusted lending is more prevalent and more profitable in cities where traditional bank loans grow slower, which has been giving rise to ‘surrogate intermediaries’ as Ruan coins them. Entrusted lenders also appear to use existing cash rather than raise external finance to make the loans. He sees limited financial stability risk, likely as a consequence of reasonable geographical dispersion. T. Ruan, (2017), The Economics of Shadow Banking: Lessons from Surrogate Intermediaries in China, NYU Stern Job Market Paper, December 19.
- 379.
K. Hachem, (2018), Shadow Banking in China, Annual Review of Financial Economics, Vol. 10, pp. 287–308. Not sure what the point is. Nobody has ever claimed that the Chinese fundamentals are different from other shadow banking systems. What has been claimed is that the appearance has been fundamentally different than most Western SB systems, simply due to the different structure of their financial systems. Ultimately every SB system emerges and models itself based on regulation, financial infrastructure and economic market design as fundamental principles.
- 380.
D. Weinland, (2019), China Shadow Banking Cools for First Time in a Decade, FT, March 19; H. Lockett and Y. Jia, (2019), Chinese Stocks Fall on Fears of Fresh ‘Shadow Banking’ Purge, FT, April 22.
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Nijs, L. (2020). Shadow Banking in Asia. In: The Handbook of Global Shadow Banking, Volume II. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-34817-5_5
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