The Rise and Fall of Shadow Banking in China

In this paper, we discuss the economic and political conditions that gave rise to shadow banking in China and the relationship of those conditions to the financial crisis in the West. There is very little literature on Chinese shadow banking, examined from a political economic perspective.  A finance-fueled stimulus package, coupled with moral hazard, produced a shadow banking system that fomented risk.  We examine the types of shadow banking instruments, including trust and wealth management products, bankers’ acceptance notes, and entrusted loans, that arose.  We then look at the way in which shadow banking rapidly lost its luster and converted from a lending boom into a debt debacle that was absorbed under the umbrella of restructuring.  We examine the political economy of this process, and conclude with policy implications.