Research On The Impact Of Shadow Banking System’s Credit Creation On Monetary Policy In China

The shadow banking issue has gained significant prominence since the financial crisis in2008. Increasing attention in recent years has been drawn to the burgeoning scale of shadow banking in China. This is to some extent due to the relatively low marketization degree of financial market, fledgling market-based reform of interest rate, separate operation and separated supervision. The monetary effects of some financial instruments are not adequately supervised so that the utility of traditional monetary policy tools gets interfered. Thus, it is of great value in maintaining the steady economic and financial development to explore the inner link between the credit creation of shadow banking and monetary policy as well as improving and refining monetary policy system, which is now the realistic choice of the Central Bank.This thesis examines the correlation between the development of shadow banking system and monetary policy in China from the credit creation viewpoint, combining the typical operation mode of shadow banking system before the international financial crisis. It also puts forward corresponding policy proposals which direct at the influence of monetary policy on the present credit creation of shadow banking system in China. Along this logic path, this study investigates the credit creation mechanism and credit scale of shadow banking system in China starting from the analysis of the system’s emergence and development. Then the impact of shadow banking on monetary policy objectives, tools and transmission mechanism is analyzed in detail when it inspects the challenge of shadow banking to monetary policy.Based on the research above, it analyzes the influence of shadow banking system on the ultimate and intermediate targets of monetary policy in China through VAR Model Analysis, Stationary Test, Granger Casualty Test, Impulse Response and Variance Decomposition, which illustrates the impact of shadow banking on monetary policy and comes to the conclusion that:by increasing money supply and liquidity, shadow banking generates strong price effect and produces a long-lasting effect on money supply. Therefore, supervision shall cover aspects like capital, scale, real risk transfer, etc.,further enhance the marketization degree of financial market in China, and contribute to risk aversion making the utmost of channel advantage of shadow banking in financing.