Shadow Banking and Systemic Risk in China

In this paper, we discuss elements of systemic risk and the Chinese shadow banking sector, and analyze systemic risk in the Chinese shadow banking systems using a Markov model. Dispersion of risk across the “under-developed” shadow banking system in China has led to some cases of localized, concentrated risk, but not to large levels of systemic risk. However, based on our Markov analysis, we find that some systemic risk is presented by trust companies and that banks absorb most of this risk in the financial system. We conclude with policy recommendations.