How Shadow Banking Affects The Stability Of Financial Market

With the development of our financial market, our country has become acompetitive entity in the world. However, there is some new problem occurred alongwith the vitality of our financial market, and among all the problems, bank-trustcooperation is the most dangerous part of “shadow banking” system, whichtremendously affects the stability of our country’s financial market, and paralyzesour country’s monetary policy.The essay explains the different types and offering methods of bank-trustcooperation financial products, and analyzes its mechanism towards monetary market.Once the domestic money supply Exceed the country’s demand for money, it willincrease domestic inflationary pressure and threaten the independence of domesticmonetary policy. In Theory, sterilization can help an economy,without full capitalmobility,to achieve some extent independence of its foreign exchange policy.Thisarticle focuses on the following questions: Firstly, whether the sterilization tools ofChina are effective; Secondly, whether the intensity of sterilization changesstructurally; Thirdly, cost and sustainability of sterilization.The essay proved that bank-trust cooperation financial products have a strongimpact to the monetary market through monetary theory model, and by Empiricalanalysis, calculates to which extent the bank-trust cooperation financial productsaffect our monetary market.Through the cointegration test and Granger causality test, it is proved that thereis a strong relation between Shadow Banking business and monetary supply, which isthe key reason why the monetary policies by the central bank is not effective.The last of paper is about sterilization cost, including systematic analysis of theimpact on the economic system and distortions on financial markets. Suggestions onhow to alleviate the pressure on Shadow Banking, including the relaxation of theexchange rate band, reforming mandatory foreign exchange settlement system,encouraging foreign investment are proposed. It also suggests to establish the Exchange Stabilization Fund to cut off the ties between the foreign exchange reservegrowth and base money.Let the market decides the interest rate is also a key point to solve the problem ofshadow banking. Of course, it is also a way to improve the structure of China’seconomy, and make a better and healthier system to develop our financial market aswell as the economy.