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| Economics of China's Shadow Banking: Definition,Composition,and Measurement |
| LI Wenzhe
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| PBC School of Finance, Tsinghua University;Monetary Policy Department, The People's Bank of China |
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Abstract Since the global financial crisis of 2008, a major event in China's financial system has been the ascent of shadow banking. Consisting of bank wealth management business, inter-bank business, trust loans, entrusted loans, and various asset management products, so-called shadow banking is rapidly expanding in scale, has an increasingly complex transaction structure, and involves a wide variety of market entities. According to our estimation, shadow banking in China amounted to RMB 51.1 trillion yuan at the end of 2017, which is 7.7 greater that at the end of 2008. Its average annual growth rate is 25.5%, the highest being 80%. At the end of 2018, shadow banking stocks were estimated at 48 trillion yuan.
China's shadow banking has exerted broad influence on monetary policy regulation and financial stability. When expanding, it provides the real economy with additional financing other than traditional loans and bonds. When shrinking, it makes credit decrease faster, and increases the downward economic pressure. Against this background, it has important theoretical and timely practical significance for understanding the business structure of shadow banking and accurately estimating its aggregate quantity change, thus helping us to grasp the business of shadow banking, strengthen our understanding of the financial sector in economic development, and conduct high-quality theoretical modelling and empirical research.
The main work and conclusions of this study are as follows.
First, this paper gives a definition of shadow banking based on functionality and analyzes different shadow banking businesses by type. Shadow banking is defined as financial businesses that rely on the banking system and conduct banking business but without strict banking regulations. Specifically, it includes all financial businesses that are beyond the scope of on-balance sheet loans and bond investment of banks, the essential functionality being credit, maturity, and liquidity transformation, the essential result being the creation of “money,” and the principal entity being banks that endorse the development of shadow banking. Shadow banking in line with this definition is more closely correlated with monetary policy regulation and financial stability. This study provides a structural map of shadow banking focused on both the source and application of funding, and providing greater clarity compared with other maps in the current literature. Shadow banking business is classified into undiscounted bankers' acceptances, quasi-loans, and financial nesting. Quasi-loans include the repos of bankers' acceptances, inter-bank entrusted payments, and repos of beneficial rights to trust products. From the perspective of the funding source, financial nesting includes on-balance sheet bank funding and off-balance sheet wealth management business, while from the perspective of the application of funds, it includes trust products, wealth management products, entrusted loans, bond investments, etc. This study summarizes the transaction structure, business entity, business substance, source of funding, legal basis, and balance sheet expression of all business types.
Second, this study accurately estimates the monthly data of shadow banking aggregates and balance sheet structure from 2002 till now. The seven principles for estimation are reliability, replicability, no double counting, conservative estimation, high frequency and continuity, comparability, and the matching of stock values with increments. We start from the liability side of the balance sheet, which fully covers all shadow banking businesses and produces its aggregate quantity, while avoiding double counting. The estimation results of this study are accurate. Further, after adequate statistical adjustment, the data reaches the goal of matching stock values and increments, making it convenient for calculating year-on-year and month-on-month indicators. This study presents detailed data sources and estimation methods for each major item in the shadow banking balance sheet, with the liability side including undiscounted bankers' acceptances (on both asset and liability sides), inter-bank quasi-loans, financial nesting (bank funding), and financial nesting (bank wealth management business), while the asset side includes entrusted loans, trust loans, bond investments, and other assets. The results are monthly time series data for each major item from 2002 until now.Estimation methods and data in this paper could be tested and improved by future researchers. The detailed and accurate data in this paper also lays solid foundation for future research on shadow banking.
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Received: 07 December 2018
Published: 12 April 2019
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