The paper aims to analyze the development of the shadow banking system in China
and its role in the rapid economic growth in China for the past three decades. The
shadow banking system supports small and medium sized firms and agricultural
development projects. This has an important impact on poverty reduction in China as
farmers largely refer to informal financial channels to get credit support for seeds,
chemicals and animals. The shadow banking system offers credit supplies to lenders
who cannot easily obtain credit from the official banking system. The credit
supplies they offered use different financial instruments, come with higher interest
rates, and were often disguised as financial products landing within the regulatory
framework of the administration. The commercial banks also used the shadow
banking financial instruments to meet capital thresholds from the People’s Bank of
China. As a result, the shadow banking products create longer credit chains, distort
credit flows in the financial system by diverting investments into short-term, high
return, more risky financial markets. The turbulences in the interbank transaction
market, the financial derivative market, the stock exchange markets (including the
main-board, the “second tier” market for SMEs and the “third tier” market for
start-ups), and the real estate market are all heavily involved in transactions conducted
by the shadow banking entities. The shadow banking system in China has been
expanding at a pace beyond the current regulatory structure. The internet P2P
investment platforms, for instance, become popular with investors and raise funds up
to RMB 1 billion each platform. There exist over thousands of internet investment
portals, the most popular one being “Yu E Bao”, offered by Alibaba.com. The
traditional regulatory institutions, however, do not cover shadow banking investment
activities made online. Neither are insurance offered to insurance made online; as the
new deposit insurance scheme only cover deposits made in the official banking
system.
With the ambition of boosting the internationalization of the RMB, financial
deepening and economic reforms in China, the financial regulators in China face the
dilemma resulting from the regulatory arbitrage associated with the expanding
shadow bankinBBC system. Individual investors in China purchase the shadow
banking investment products and assume their purchases come with implicit
government guarantees, such as wealth management products sold by commercial
banks for trust companies and local government investment platforms. On the other
hand, it is critical for investors to make rational investments; thus, regulators are
obliged to remind investors of risks related to the shadow banking products, that the
fantasy of governments repaying failing shadow banking investments will be not
realized. It is also the responsibility of the regulators to divert funds collected by the
shadow banking entities to long-term investments to build up industrial bases.
The financial deepening in China required the transformation of the shadow banking
entities and financial products offered into ones with adequate capital cushions and
sufficient liquidity. The internationalization of the RMB necessates the opening up of
the capital, hence financial account in China. However, the 1997 Asian financial crisis,
and the hyperinflation resulting from the dollarization in Latin America has led the
Chinese regulators to be cautious in conducting currency liberalization and financial
reforms. The opening up of the financial account with the liberalization of the
exchange rate regime doubles the financial risks, increases the possibility of financial
crises, and may result in the stagnation of economic growth. The function of the
central bank as the lender of the last resort demands effective and prudential
regulations for SIFIs, and also seeks to functioned to boost market confidence. At this
critical turning point of the Chinese economy, defining the role of the shadow
banking system, bringing them into the regulatory framework, and identifying risks
created should be the priority of the financial regulators in China.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/19412 |
| Date | 29 January 2016 |
| Creators | Chen, Nuoya |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | application/pdf, application/pdf, application/pdf |
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