Dual Track Interest Rate System, Shadow Banking And Economic Growth

Firstly, the paper introduce the history of dual track prices system, and distinguish the dual pricing system under varying degrees of market segmentation. Based on it, the paper divided dual track system of interest rate into perfect market segmentation,strong market segmentation and weak market segmentation dual track interest rate system.This paper also compared the dual track interest rate system in China with the dual-track interest rates system in US and Pointed hat inflationary pressures play a important role in the formation of the dual track interest rate system in US, which is a induced institutional change.In contrast, the dual track interest rate system in China is the result of joint action of the government and market,which is not only a mandatory institutional changes, but also a kind of induced institutional change.As for the definition of shadow bank, after reviewing the different definition of shadow banking, the paper classify the shadow banking in china into the shadow banking based on traditional banking system and the shadow banking whose funds come from the private sector. we believe that the shadow banking based on traditional banking is the key factor in the rise of Chinese shadow banking. After the introduction of weak market segmentation dual track interest rate system instead of strong market segmentation dual track interest rate system. The expansions of trust whose funds come from the traditional banks and finance product issued by the traditional banks lead to the rapid expansion of China’s shadow banking.The paper also compared the origin of shadow banking between US and china.the formation and expansion of the shadow banking in china is closely linked to the dual track interest rates system, the expansion of the US shadow banking expansion before 1986 is driven by dual track interest rate system. while the expansion of shadow banking in US after 1986 is to avoid the stringent capital regulation, the rise of shadow banking and dual track interest rates system rooted in the structure of property rights, while the rise of shadow banking in USA is a result of avoiding supervision of regulator. The paper also reviewed the economic impact of shadow bankingUnder the binary structure of property rights,the state-owned company will have priority in funding as a result of government paternalism (political pecking order financing), It not only led to a higher financing costs of private firms, but also indirectly led to the rise of shadow banking in china.Under the weak market segmentation dual track interest rate system, excessive expansion of the state sector will increase the cost of financial control of government, thereby inhibiting the expansion of state-owned sector.We find that, in the weak market segmentation dual track interest rate system, the government can not simultaneously achieve the goal of expanding the state sector, easing the financing of SME and reducing the financing cost of SME. If we want to simultaneously achieve the goals of easing SME financing and reducing the financing cost of SME, the government must reduce the size of the state sector and government expenditure. Government’s paternalism on SOE also led the expansion of inefficient state sector, it forced the government to maintain the dual track interest rate systmen, which not only led to the misallocation of financial resources, but also induced the rent-seeking behavior and the expansion of the shadow banking.Government’s paternalism on SOE is harmful, it not only hinders the improment of economic efficiency, but also affects the stability of China’s financial system.Fundamentally speaking, the issue of China’s financial system remains a problem of property, in order to effectively solve the excessive expansion of the shadow banking, the only way is to continue to promote the reform of property rights, the liberalization of interest rate without touching the property rights basis will not solve the problem of shadow banking and dual track interest-rate system.The rise of the shadow banking can also be viewed as changes in the financial structure, we can not understand the rise of shadow banking only from the perspective of dual track interest rate system.We explore the causes of shadow banking from the perspective of financial structure, the paper found that the driving force of shadow banking system changed around 2008, before 2008, the main driving force for the expansion of the shadow banking is the financial demand of private firms. However, after 2008, the driving force of the shadow banking expansion switched from the demand of private firm to the demand of real estate company and local government. The macro-control for the real estate and tight monetary policy are positively linked to the expansion of the shadow banking. The restrictive policies forced the real estate companies and local government to get money from the shadow banking system. In addition,In a weak market segmentation dual track interest rate system, the rise of Shadow banking greatly weakened the effectiveness of monetary policy.The empirical study shows that the difference between the return on assets of private firms and the one-year lending rate is positively linked to the expansion of China’s shadow banking system. However, the dual track interest rate system is only a prerequisite for the expansion of shadow banking in China, but not the only reason.The empirical study found that the financing needs of local government and real estate sector become the main driving force of the expansion of shadow banking in china after 2008 instead of private industry firms. The soft budget constraint of local government and the real estate bubble result in the excessive financing need.when the financing needs can not be fully met by the banking system controlled by the central government, they will turn to the shadow banks, which result in the big expansion of shadow banking system after 2008.The changes of driving forces of shadow banking is closely linked to the global rebalancing. In the context of global rebalancing, the decline of external demand led to a decline in economic growth and decline in the profitability of private enterprises, forcing local governments to expand government spending to sustain economic growth, it also led to the expansion of real estate sector. The expansion demands of real estate sector and local government financial needs can be satisfied by shadow banking system in the weak market segmentation dual track interest rate system,The paper shows that the expansion of shadow banking in china is closely related to the dual track interest rate system, however, it is not wise to completely attributed the rise of China’s shadow banking to the dual track interest rate system. The rise of the shadow banking are also linked to the global rebalance, local government SBC and real estate price bubbles.These problems can not be handled by the liberalization of interest rate. The in-depth reform of property rights and the adjustment of economic structure are needed for solving the problems. Under the SBC of local government and the existence of real estate bubbles, local government and real estate sector will still have strong demand for financing. Under the weak segmentation dual track interest rate system, the financing needs of local government and real estate will be satisfied by the shadow banking system. The experience of USA shows that the capital requirement will lead to the expansion of shadow banking even without the dual track interest rate system. So the key of solving the problem of shadow banking is to solve the problem of SBC of local government and the real estate bubble. while implementing the liberalization of interest rate.The paper also examine the relationship among the shadow banking,economic growth and TFP. My research showed that there is a nonlinear link between shadow banking and economic growth&TFP. The efficiency effect and rent-seeking effect of shadow banking exist at the same time. As for the relationship between shadow banking and economic growth, the efficiency effect of shadow banking dominated while the scale of shadow banking is small, however, with the expansion of shadow banking, the rent-seeking effect of shadow banking is higher and higher. The positive effect of shadow banking will decline with the expansion of shadow banking. As for the relationship between shadow banking and TFP, the expansion of shadow banking is positively linked to the growth of TFP due to the efficiency effect of shadow banking expansion. However, when the shadow banking size is too large, the positive effect of shadow banking on TFP will decline.My paper also showed that, As the driving force of the shadow banking switched from private firms to local government and real estate sector, the positive effect of shadow banking on TFP declined after 2008. Based on the research of my paper, I propose the following policy recommendations:First, the liberalization of interest rate should be based on property rights reform, this paper shows that the dual track interest rate system is derived from the binary property rights structure and government paternalism on SOE. without the reform of property right, the problems of shadow banking and dual track interest rate system can not be soloved.Second, to solve the problem of shadow banking, we have to solve the problem of SBC of local government and the real estate bubbles. The paper showed that, the expansion of local government debt and real estate sector have been the main driving force of shadow banking expansion, without solving the SBC problem of local government and real estate bubble, the problem of shadow banking can not be solved.Third, the tightening of monetary policy and macro-control policies for the real estate will stimulate the expansion of the shadow banking, this means that the effect of monetary policy is weakened by shadow banking. Therefore, when setting monetary policy, the impact of the shadow banking should also be taken into account, the central monetary authorities should gradually explore new monetary policy rule.Fourth, the government should curb excessive expansion of shadow banks, under the context of the dual ownership structure, On one hand, the expansion of the shadow banking increase economic efficiency; on the other hand, the expansion of shadow banking will increase rent-seeking cost,.Overall, the expansion of the shadow banking is conducive to economic growth and TFP, but the over-expansion of the shadow banking will lead to a decline in its positive effects.