Shadow Banks in China Reviewed by China's Economy & Policy-Gateway International Group27 Feb 2012 • by Natalie Aster
Shadow banking systems are gaining increased attention from economic theorists and practitioners in China and abroad. In recent years, China has seen significant developments in the domestic shadow banking system. However, the common characteristics of shadow banks, excessive leverage and intentional avoidance of financial regulation, have brought new vulnerabilities to the financial system. The development and characteristics of China’s shadow banking system are somewhat different from those abroad, as revealed in this paper.
According to the report “The Development and Characteristics of Shadow Banks in China ” by China's Economy & Policy-Gateway International Group, the term “shadow bank” was coined by Paul McCulley, the managing director at Pacific Investment Management Company (PIMCO), in 2007. Not long after that, Timothy Geithner, the United States Secretary of the Treasury, introduced the concept of the “parallel banking system”, which refers to the parallel financial system which emerged outside of the framework of traditional commercial banks. Ben Bernanke, the Chairman of the U.S. Federal Reserve, in his testimony to Congress on September 2, 2010, defined shadow banks as “financial entities other than regulated depository institutions that serve as intermediaries to channel savings into investment”.
The Development and Characteristics of Shadow Banks in China
Published: January, 2012
Price: US$ 200,00
Shadow banking is an effective complement to the financial industry and the development of the shadow banking system in China is closely related to the development of the financial system. The limited financing channels, strict credit control policies, and innovation in the domestic commercial banking system, have all contributed to the growth of shadow banks.
China’s economy is under great pressure because of the impacts of the global economic environment, especially the sustaining effects of the U.S. subprime mortgage crisis and the ongoing European debt crisis. In response, the People’s Bank of China has implemented prudent and tight monetary policies. It has raised the deposit reserve rate repeatedly, even to its historic highest level. As a result, the commercial banks have increasingly limited amounts of funds to lend. To break this constraint, the banks promote cooperation with trust companies, through which they can lend without the use of deposits. By issuing trust wealth management products, the banks can collect funds to lend to enterprises under less or no supervision from the regulators, as trust wealth management products exist off the balance sheets of the banks. To some extent, this situation has helped to fuel the development of shadow banks.
More information can be found in the report “The Development and Characteristics of Shadow Banks in China” by China's Economy & Policy-Gateway International Group.
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