Creeping Up in the Shadows: A Case Study of the Drivers and Consequences of the Chinese Shadow Banking System

Abstract

This paper analyzes the drivers and consequences of shadow banking loans in China between 2013 and 2017. Using data from the People’s Bank of China, I exploit provincial variation in the volume of shadow banking loans to assess the drivers behind its growth and the consequences as a result. The key drivers from my study behind shadow banking loans are bank loans, deposits and the search for yield, given the low interest rate environment. Shadow banking is associated with a 4.698 percentage point increase in the share of investments to the real estate sector, and a 1.7 percentage point decrease in the share of investments to the private sector. Based on an approach considering both the drivers and consequences, I conclude that shadow banking loans and bank loans are substitutes over time, and the implications of the growth of the shadow banking market is crucial for policymaking.