IEMS Newsletter - Aug 2015 - page 1

China’s pattern of state capitalism is
associated with directed credit and financial
repression, which has privileged state-owned
enterprises (SOEs) over private firms. However,
the monetary expansion of the late 2000s,
coupled with new technologies of finance,
have led to a remarkably “liberalized” financial
environment, in which both state and non-
state actors are involved in shadow banking.
Novel forms of Internet financing, wealth
management funds, and local government
financing vehicles have flourished in the last
five years. Yet this pluralization of financial
products from financial marketization did not
result from de-regulation or liberalization of
interest rates. Instead, continued financial
repress i on , comb i ned wi t h mone t a r y
expansion and new technologies of finance,
has fueled shadow banking within the broader
context of state capitalism in China.
Although over 99 percent of registered
firms are small and medium enterprises, state-
affiliated firms receive over 85 percent of loans
extended by state-owned commercial banks,
and account for over 60 percent of publicly
listed businesses on China’s stock markets.
Private businesses have thus relied on a
variety of informal financing mechanisms since
the earliest years of reform. More recently,
the scope of informal finance has expanded
into the broader universe of shadow banking,
involving not only private entrepreneurs, but
also middle-class professionals seeking wealth
management products and local governments
facing unfunded mandates. The contemporary
map of informal finance and shadow banking
has intersected with vested interests in the
state sector.
Informal finance refers to financing,
savings, and investment vehicles that are not
sanctioned by the People’s Bank of China,
but most types are not explicitly banned.
Various informal financing arrangements and
non-banking financial institutions are either
registered with other official entities—or quietly
condoned because they provide financial
services to underserved local markets.
The least institutionalized forms of informal
finance include interest-free, uncollateralized
loans among friends, families, and business
associates. Similarly, extending trade credit is
a standard operating practice among private
vendors. Borrowing from individual money
lenders and money brokers (called
Piggy Bank on Money Stack by
DNY59/E+/Getty Images
, BY-NC 2.0.
The Rise of Shadow
Banking in China:
The Political Economy of Modern
Chinese State Capitalism
Kellee S. Tsai
China’s response to the global
financial crisis created an
unprecedented expansion
of bank lending after 2008,
spurring a host of state-
sponsored economic actors—
including SOEs, state banks, and
local governments—to expand
their off-balance sheet activities.
Off-balance sheet activities and
shadow banking are estimated
to account for 26-69% of China’s
entire GDP (see figure on page 2
for details).
To reduce some of the risks
associated with shadow banking,
China must implement deeper
SOE reforms, increase market
access in the services sector,
establish small- and medium-
sized banks, and set up channels
for debt issuance by local
1 2,3,4
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