Making Sense of the Rise of China's Shadow-Banking

Abstract

This paper aims to make sense of the rise of shadow banking in the context of the Chinese economic transformation to see if the regulator could avoid the hard-crash. Reportedly the estimated size of China's shadow banking system has reached to the level of equivalent to 36 percent of GDP as of the end of March 2013. But the emergence of systemic risk in accordance with the expansion of shadow banking in China does not seem to be a strong possibility, partly because even if the turmoil in the shadow banking occurs, commercial banks typically are not responsible for compensating customer losses so far as an effective firewall between commercial banking and shadow banking is constructed. Meanwhile, the information on who provides risk funds to the shadow banking system and on how the funds are used by ultimate users is still under the shadow of the system. This paper aims to make sense of the limited disclosure of information on shadow banking for the regulator to ease the so-called "audience effects", making time for the transformation to a new phase of post-industrialization.

Keywords: Audience effect, China, Shadow banking