Shadow Banking in China
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Shadow Banking in China

Risk, Regulation and Policy

Shen Wei

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.
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Chapter 6: The logic (or illogic) of China’s local government debts out of control

Shen Wei


After the Greek sovereign debt crisis, Detroit grabbed market headlines for its decision to file for bankruptcy in 2013 regarding its long-term debt obligations of at least US$18 billion. A possible local government debt crisis in China, at the same time, has been looming in the Chinese and global press. Local governments’ huge and opaque debt, totalling US$3.8 trillion by the end of 2014, has been seen as one of the significant risks threatening China’s overall economy. Unfortunately, the phenomenon has yet to be understood adequately both in terms of its magnitude and its origins. This chapter is primarily concerned with the deep causes of and potential solutions to local government debts in China. An attempt is made to understand the causes of local government debts through various dynamic elements of China’s public and fiscal finance, including revenue collection, allocation of government responsibility, fiscal expenditure and fiscal transfer within the central and local governments. Local governments’ spending patterns reveal a deep and fundamental flaw in the overall governance structure, which necessitates a more comprehensive reform tackling the root problems underlying the local government debt crisis in China.

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