Shadow Banking: China's Dual-Track Interest Rate Liberalization

58 Pages Posted: 14 May 2015 Last revised: 16 Oct 2021

See all articles by Hao Wang

Hao Wang

Tsinghua University

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Lisheng Wang

The Chinese University of Hong Kong (CUHK) - Department of Economics

Hao Zhou

SUSTech Business School; Tsinghua University - PBC School of Finance

Date Written: October 7, 2019

Abstract

Shadow banking in China constitutes a dual-track interest rate reform that adds a new market track beside the controlled formal banking track. Shadow banking leads to Kaldor-Hicks improvement if the gains from financing the underfunded private enterprise (PE) and reducing bank capital idleness caused by ultrahigh reserve requirements outweigh the losses from shadow banking risk. Pareto improvement is feasible as the state-owned enterprise (SOE), a potential reform loser, participates in shadow banking to transfer credit to the more productive PE. Full interest rate liberalization, which removes formal banking controls after the dual-track reform, does not warrant additional profit gain if bank credit misallocation favoring the SOE and SOE's low productivity persist.

Keywords: Shadow banking, interest rate liberalization, dual-track reform, Kaldor-Hicks improvement, Pareto improvement

JEL Classification: G21, G23, G28, P21, P31, P34

Suggested Citation

Wang, Hao and Wang, Honglin and Wang, Lisheng and Zhou, Hao, Shadow Banking: China's Dual-Track Interest Rate Liberalization (October 7, 2019). Available at SSRN: https://ssrn.com/abstract=2606081 or http://dx.doi.org/10.2139/ssrn.2606081

Hao Wang

Tsinghua University ( email )

318 Weilun Building
Tsinghua University
Beijing, 100084
China
86 10 62797482 (Phone)
86 10 62794554 (Fax)

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Lisheng Wang

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Hao Zhou (Contact Author)

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong
China
+86-0755-88010464 (Phone)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

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