Shadow Banking in China

Shadow Banking in China

Risk, Regulation and Policy

Wei Shen

This timely book investigates the dynamic causes, key forms, potential risks and changing regulation of shadow banking in China. Topics discussed include P2P lending, wealth management products, local government debts, and the underground lending market. Taking policy considerations into account, the author provides a comprehensive analysis of the regulatory instruments tackling the systemic risks in relation to China’s shadow banking sector. Central bank’s role, interest rate formation mechanism, exchange rate reform and further deepening reform of the regulatory regime and financial markets are also thoroughly discussed in the context of China’s continuing financial reform.

Chapter 9: Credit crunch and liquidity supply in China’s banking sector

Wei Shen

Subjects: asian studies, asian politics and policy, economics and finance, asian economics, financial economics and regulation, law - academic, asian law, finance and banking law, regulation and governance


China recently experienced the most severe cash crunch since the 2008 financial crisis, which was evidenced by a credit crunch in mid-June 2013. Lenders rushed to raise funds from the market in order to meet capital requirements, pushing the interbank lending rate up to as high as 28%. The sudden cash squeeze shocked the global markets. This chapter tries to understand why the credit crunch took place in 2013 and why China’s central bank, unlike what it has often done through “credit easing”, refused to inject any credit liquidity into the market on this occasion. Sections 1 and 2 offer an overview of the credit crunch in general and in China, respectively. Section 3 explains the reason for no credit crunch in China even in the latest financial crisis. Section 4 focuses on the credit crunch episode in 2013 and unveils the central bank’s no-action policy towards this credit crunch. A discussion of various economic and institutional factors is offered in Section 5 to explain why this no-action strategy is not sustainable in a long run. Section 6 wraps up the chapter by looking into the possible macroeconomic policy change which may affect the central bank’s monetary policymaking.

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