The Development Of China’s Shadow Banking And Its Impact On Monetary Policy

Every great crisis promotes the theoretical research forward. After the current subprime crisis, a new concept causes the attention of scholars from various countries——shadow banking, which is also known as the "The Parallel Banking System". It is put forward compared with the concept of traditional commercial bank, which is that can perform similar functions of traditional bank financing and providing liquidity and credit, but it does not belong to the financial intermediary system of traditional commercial bank. According to the spirit of FSB (2011) report, Chinese shadow banking can be defined as:an entity or quasi-entity being engaged in the activities of financial intermediation and has the functions similar to similar to the traditional bank credit, term or liquidity transformation function, but not by the Basel III or equivalent degree of supervision entity or entities. Combined with the characteristics of China’s financial system, the shadow banking should include:commercial Bank’s off-balance sheet financial products, securities companies, a collection of financial management, money market funds, private equity funds, trust products, asset-backed securities, the petty loan company and folk loan financing mechanism.The characteristics of the shadow banks, such as high leverage, information asymmetry, credit creation, maturity mismatching and outside the supervisory, make it have internal vulnerability. In the current continually deepening financial system, it has been widely used in various aspects, which brings systemic risk to the financial system and causes the subprime crisis. Most of researches on shadow banks are concentrated on the development of American shadow banks and the relationship between the current subprime crisis and them. There are a few scholars conduct studies on the shadow banks of our country, but most of them are restricted to the concept of the shadow bank and the studies on the influence upon the China’s economy by the shadow banks is mainly qualitative, which emphasizes how to supervise. Because of data limitations, the time span of the study of China’s shadow banks is mainly based on that after the crisis and there are not many literatures from the quantitative point of view to study the shadow banks and its influence on the monetary policy. This paper attempts to expand the research from the following aspects and answer the following questions:what are the shadow banking development status and scale in China? With the increase of the proportion of shadow banks in the financial system, whether it influences the traditional monetary policy? How far does it effect? For the research results, what are the implications for the shadow banking supervision? It is helpful for the financial policymaking departments, regulators, financial institutions, the researchers to learn more about the current development situation of China’s shadow banking products, for People’s Bank of China to develop a reasonable monetary policy to achieve the ultimate goal of monetary policy, to establish supervisory system of the shadow banking system agreeing with China’s national conditions, and to provide a solid micro foundation in order to prevent financial risks.This paper contains five parts. The first part is the introduction, including research background, significance, research ideas and methods of this paper.In the second part, this paper specifically studies the summary of the shadow banking, the definition, characteristics and the related studying level at home and abroad of the shadow banking and it describes the development history and its characteristics of American shadow banks. Through comparing the studies on the shadow banks in Chinese and foreign literatures, the other side of Chinese and foreign literature research on shadow banks, this paper analyzes the connotation and essential and correctly defines the shadow banks, and defines the denotation of the shadow banks on this basis and makes classification. In the study of literatures, this paper finds that the existing literatures are not enough and there is a little research on China’s shadow banks, most of them staying at the macro level. The literatures of specifically studying the development history and scale of China’s shadow banks, as well as of the impact on China’s macro monetary policy are too rare. These find a breakthrough in theoretical research for this paper.The article reviews the development of the shadow banking in the United States, as a foundation for the comparative study of shadow banking, makes research and sums up that the reason of the rapid development of developed economies banking shadow is awash with liquidity and financial innovation. The historical background of the development of the shadow banking is Fed continues to issue currency, provides liquidity, which provides plenty of ammunition for the development of the shadow banking. Besides that, the nature profit-driven of the financial institutions, in order to reap maximum profits, they use a variety of new financial innovation tools to bypass regulators. The development of financial technology increases mobility, and enhances the efficiency of the financial system. Financial innovation directly resulted in the generation of the shadow banking sector. And on the contrary, the shadow banking also stimulates the financial innovation. Retrospective study the development of the shadow banking in the United States, to study the internal mechanism of the subprime mortgage crisis, summed up its high leverage, asymmetric information, you can create credit, maturity mismatches and drifted away from the regulatory characteristics outside. It is these characteristics, the inherent instability of the financial system, the accumulation of systemic risk, the shadow banking become an important cause of the subprime mortgage crisis.The third part is combined with the second part of the definition of shadow banking in China, as well as the development of China’s shadow banking status and statistical data availability, the classification of shadow banking products introduced, the statistics of its size. The study found that since2002, China’s shadow banking has been an upward trend in the development and in the last five years has grown rapidly. Next, by studying the history of the development of the various parts of the shadow banking, sum up the development of China’s shadow banking reasons. The rapid development of China’s shadow banking major demand from financial institutions increased competition and enhance residents’ financial awareness, financial institutions profit-driven demand and financing body. The specific combination of the characteristics of the U.S. shadow banking Comparative Analysis of Chinese and foreign shadow banking major sources of funding, product innovation is significantly different, the development of China’s shadow banking shorter, not yet fully systematic.In the fourth part of the theory were discussed from the currency channel, credit channel, as well as the ultimate goal of China’s shadow banking mechanism of the development of China’s monetary policy. Classification study found that China’s shadow banking accounted for an important proportion of financial products, trust products and brokerage collection financial products are dependent on bank credit bank in disguise. Restrictions are because there is no money for deposits increased by increasing the credit creation credit supply. The shadow banks create credit, also increased the total amount of money, deviation statistics of the amount of money the central bank. Its development makes the definition and measurement of the currency becomes complicated, the original controllability of the money supply, testability weakened. However, due to the development of China’s shadow banking shorter, not a large number of complex financial derivatives, is still dependent on the development of the survival of the traditional banking system, such as financial products, trust products and financial products such product than the major brokerage collection, many of which are third-party custodian, enterprises will be incorporated into the statistics of the amount of money in the bank. So in the statistics of the amount of money, so the impact is not great indicators of M2. Subsequently, the article uses the SVAR model from an empirical point of view to analyze the impact of monetary policy on China’s shadow banking.Shadow banking and financial system at the end of this article, is the analysis of the shadow banking risks and put forward a proposal on the regulation. That China’s shadow banking risks come from the risk of default triggered by the shrinking of the sources of funds and the use of the mismatch, and the collateral value of the shadow banking products. Specific regulatory proposals:1. Strengthen the relevant legal and regulatory framework and institutional building;2. Increase the transparency of the shadow banking information;3. Strengthen the system of public disclosure, steady advance of financial product innovation;4. Establish a macro-prudential regulatory framework.The shadow banking development broadens the financing channels for enterprises, local governments and other economic entities credit, a challenge for macro-prudential regulatory framework. People’s Bank of China will need to improve liquidity management mechanism to increase the use of targeted policy instruments, and effectiveness. For its impact on monetary policy, the interest price categories of indicators will gradually replace the M2, to become the mainstream of the market observed liquidity changes. Cultivate various types of financial market development. Promote market-oriented interest rate reform. This paper summarized comparative analysis, research methods of data analysis on the shadow banking.Expect to contribute in the following ways:First, from scoping analysis, multi-angle feature characteristics, Foreign Comparative and development history of China’s shadow banking strive to be comprehensive. Although the literature on the shadow banking a lot to this year, but most of them are concerned about the shadow banking in developed countries; Second, amend the original statistical methods to quantify an intuitive understanding of the shadow banking. Beyond the current shadow banking only stay on the macro and qualitative research. Finally, the specific characteristics of China’s shadow banking combined with the existing stage of development of our country, trying to give the some suggestions. Through this research, we can do some specific regulatory reference.