The upsurge of shadow banking is typically driven by rising financing demand from certain real sectors. In China, the four-trillion-yuan stimulus package in 2009 was behind the rapid growth of shadow banking after 2012, expediting the development of Chinese corporate bond markets in the post-stimulus period. Chinese local governments financed the stimulus through bank loans in 2009, and then resorted to non-bank debt financing after 2012 when faced with rollover pressure from bank debt coming due. Cross-sectionally, using a political-economy-based instrument, we show that provinces with greater bank loan growth in 2009 experienced more municipal corporate bond issuance during 2012–2015, together with more shadow banking activities including Trust loans and wealth management products. China’s post-stimulus experience exhibits similarities to financial market development during the U.S. National Banking Era.

More Research From These Scholars

Journal Article Mar 1, 2019

Handbook on China’s Financial System: Chinese Bond Market and Interbank Market

Marlene Amstad, Zhiguo He
BFI Working Paper Mar 1, 2019

Leverage-Induced Fire Sales and Stock Market Crashes

Jiangze Bian, Zhiguo He, Kelly Shue, Hao Zhou
BFI Working Paper Nov 20, 2019

Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets

Hui Chen, Zhuo Chen, Zhiguo He, Jinyu Liu, Rengming Xie
Topics:  Financial Markets