The Research About The Impact Of Shadow Banking On The Effectiveness Of China Monetary Policy

Over the past decade, with the rapid growth of China’s economy, the domestic financial environment has also taken great changes. Financial innovation has provi-ded a good guarantee for the economic growth of our country. However, continuous financial innovation also makes the bank financial products, entrusted loans, trust loans, folk loan and other shadow banking products gradually be known to the public. The shadow banking is considered to be an important driving force for financial crisis burst out in late 2007.The shadow banking damage ability should not be overlooked. Compared with developed countries, China’s asset securitization development and financial liberalization is at low level. The complexity of the shadow banking in China is quite lower than that in foreign countries. But since 2010, China’s shadow banking has developed rapidly. Along with shadow banking development, China’s financial structure and system has also been undergone significant changes. The formulation, implementation and control of monetary policy in our country are increasingly influenced by the shadow banking. This kind of influence will undoubtedly bring great challenge to the monetary policy which is mainly relying on the commercial banking system in our country. Monetary policies which charged by People’s Bank of China are important means to achieve price stability, full employment, economic growth, international balance of payments and financial stability. Whether the monetary policy is effective or not, it is directly related to the stability of a country’s economy and finance. Under this background, it is of great importance to research the mechanism of the shadow banking on the monetary policy system. And it will effectively improve the monetary policies in macro economic regulation.This paper that analyzes the impact of the shadow banking on the effectiveness of China’s monetary policy is based on the analysis of the status of China’s shadow banking. China is in not perfect current financial markets, separate operation mana-gement. Financial supervision is charged by three commissions:People’s Bank of China, China Banking Regulatory Commission, China Securities Regulatory Com-mission and China Insurance Regulatory Commission. This present situation results in weak regulation about the shadow banking. Thus, From the theoretical and empirical perspective to study the past classic literature, specifically speaking, this paper has done the following several aspects of the work:In the first chapter, the paper introduces the background and significance of shadow banking. At the same time, this paper sums up the research results of domestic and foreign scholars on the shadow banking, monetary policy effectiveness and the relationship between the both. And the paper adopts the authoritative definition about China’s shadow banking concept. In the second chapter, the paper describes the main types of China shadow banking in detail. That is the bank financial products, entrusted loans, trust loans, folk loan and small loan company, using relevant data and charts to show the current situation of China’s shadow banking. After that, the paper has analyzed the reasons why China’s shadow banking is developing rapidly from the perspective of financial innovation, capital demand and capital supply. Finally, on the basis of China’s shadow banking actual situation, indirect credit creation mechanism, the paper divides two types of China’s shadow banking credit creation mechanism:financial institutions shadow banking credit creation mechanism and folk financing shadow banking credit creation mechanism and carries out to analyze. In the third chapter, the paper analyzes the impact of China’s shadow banking on the role of monetary policy mechanism from the theoretical perspective. Shadow banking has a certain impact on the three major monetary policies. That is the deposit reserve system, re-discount policy and the open market operations of tools. In the aspect the transmission mechanism of monetary policy, whether from the view of balance sheet or interest rate, the shadow banking also has an impact. Finally, through considering added shadow banking credit creation, the adjusted IS-LM diagram analysis, the shadow banking can increase on the gross domestic product in the short term, but have almost no effect in the long term, and the impact of interest rates has uncertainty. In the fourth chapter, the paper analyzes the effect of the shadow banking on monetary policy from the empirical perspective. The paper chooses the shadow banking(SB), money supply(M2), consumer price index(CPI) and gross domestic product(GDP), using VAR model. The ADF test and Johansen test are used for data analysis. Finally by using the impulse response and variance decomposition, the paper analyzes the impact of shadow banking on money supply, consumer price index and gross domestic product:Shadow banking put a lot of liquidity on the market, which makes the monetary policy in the formulation, conduction and implementation to have a bias, reducing the effectiveness of monetary policy regulation. Under the influence of the shadow banking, the price level fluctuates greatly. And shadow banking in the short term can promote the output increase, but not with long-term effects. In the fifth chapter, according to the above theoretical and empirical analysis, the paper put forward the relevant policy recommendations, including guide the shadow banking development and improve China’s monetary policy tools.