Research On The Impact Of The Shadow Banking To The Transmission Mechanism Of China’s Monetary Policy

Since the US subprime crisis broke out, the shadow banking has become the focus of people’s attention. The definition of shadow banking is a kind of non-bank institutions, which can replace some functions of commercial banks without a strict regulatory system. However, because of its complex product structure, the shadow banking system successfully avoids many of the limitations of commercial banks and plays a huge role in credit creation. Although the shadow banking with its high leverage and high-yield characteristics enriches the social financing approaches and broadens the financing channels for enterprises and residents, it also bring a huge risk for the financial system due to its lack of supervision. In recent years, as China’s economy develops rapidly, the shadow banking of China continues to grow and its scale expands rapidly. However, as China’s financial system is not perfect, the shadow banking system led to interference in the transmission mechanism of monetary policy, which impacted the implementation of monetary policy. However, China’s financial system is not perfect. Firstly, the shadow banking is still remaining at an early stage of development and is still the complementary of commercial banks. Secondly, the functions and the credit mechanism of shadow banking seem to be relatively simple. Moreover, the transmission mechanism of monetary policy in China has existed some own shortcomings. Therefore, those reasons above caused the interference of monetary policy’s implementation from five channels, such as interest rate, credit, asset prices, exchange rates and the wealth effect. This paper applies the economic theory to analyze the influence of the shadow banking system to the transmission mechanism of monetary policy, which is used for providing suggestions to improve China’s monetary policy.In this paper, the theories of shadow banking and monetary policy are elaborated at first, which is following by analyzing the development status and credit creation mode of the shadow banking system. Then, as this paper focus on applying the principles of unobserved credit, which is estimating scale of the shadow banking from the borrower’s point of view and dividing the estimated size of the shadow banking into two parts, so the estimates of shadow banking scales can be more comprehensive. Finally, in ord er to analyze the influence of the size of the shadow banking to money supply M1 and GDP, the VAR model analysis is used precisely. Moreover, by using impulse response method, the impact of the size of the shadow banking to the transmission mechanism of Ch ina’s monetary policy is analyzed empirically. This study found that: in the short term, the impact of the size of the shadow banking seemed to make money supply M1 generate volatility, but it did not have a significant long-term impact. The main reason is that the shadow banking plays the role in market by providing market liquidity, which may weaken the regulatory ability of the policy of the central bank, but the impact on the money stock is not obvious. In the long-term, the expansion of the size of the shadow banking seems to be beneficial for China’s economic development. Therefore, we should strengthen the supervision of the shadow banking system, improve monetary policy objectives and tools and optimize the transmission channels of monetary policy to improve our financial system so that the shadow banking can better serve the real economy.