The Development Of The Shadow Banking And The Impact Of The Macro Market In China

This article is hoping to address four broad questions about shadow banking in China:What is shadow banking? why it grows so quickly recent years in China,What is, the impact of shadow banking on monetary policy and systemic risk? how should shadow banking be regulated?Broadly defined as credit intermediation involving entities and activities outside the regular banking system, shadow banking raises important policy concerns in China.different from what happened in the USA,shadow banking in China does not necessarily involve leverage and maturity transformation. China’s shadow banking sector has following characteristics:excessive deleverage on property and collateral value of land, sensitivity to interest rate movements and property prices, lack of regulation externally and risk management internally, and critical. dependence on a continued influx of capital and potential exposure to excess risk if liquidity becomes a problem.While it is difficult to collect the data, the size, shadow banking in China are even humbly discussed and understood. This article reviews the reason behind the growth of shadow banking in China. The most important reason is financial repression. The People’s Bank of China sets interest rates at an low level to encourage growth and to prevent "hot money," from destabilizing the economy. However, bank regulators must still fight the probability of high inflation, so they set a credit quota limit on the amount of loans allowed per year. Under this condition, private firms, especially small-and medium-sized enterprises (SMEs), find it difficult to gain loans from the state owned banks,so they must look somewhere else to get the credit,leading to the development of a shadow banking system of trust companies, entrusted bank loans, informal lending, and other off-balance sheet financing. The shadow banking system can pose systemic risks, as its importance in the total financial system grows (with the concomitant credit, market, and liquidity risks that its participants undertake), and indirectly through its interconnectedness with the regulated banking system. Just look at what happed in the USA in the sub-prime debt crisis, the liquidity crunch, the failure of several shadow banking market, just as the MMMS, repo market. This suggests that policy makers have to manage trade-offs to ensure that shadow banks provide alternative but safe sources of funding to the private sector while avoid generating additional systemic risks.A key catalyst that this article think could turn the shadow banking sector upside down is the incoming pick-up in inflation and potential for an eventual interest rate hike. When that happens, the fund influx to the bond market and WMPs could dissipate. Most shadow banking entities run on a thin equity base, so if one or two projects default, the capital base would likely be wiped out. The market would be much more concerned about credit risk among shadow banking entities, as the funding drain and duration mismatch would be likely to be exposed. Given their deep involvement, banks might be asked to take on the responsibility of repayment, to retain the social stability. If that happens, it would weaken banks’ balance sheets, causing credit to start to contract, not only in shadow banking, but also in formal banking. That might trigger a simultaneous bursting of the bubbles in the property sector, local government debt。...