The Influence Of The Development Of China’s Shadow Banking System On The Effectiveness Of Monetary Policy

Once the financial crisis burst out in2008, the problems of shadow banking caused many scholars’attention in the areas of theory and practice. Many scholars started to focus on shadow banking system, such as, hedge funds, private equity funds and asset securitization products. The influence of shadow banking system on the financial system is various and comprehensive. On the one hand, as the shadow banks have the characteristics of high leverage and profits, they have brought huge economic boom. On the other hand, the shadow banking system interferes the traditional monetary policy transmission conduction and puts a shock to the market.Above all, the shadow banking system has an influence on the theoretical basis of monetary policy, bringing many challenges to financial stability and monetary policy.At present, there is no unified definition connotation about shadow banking. According to the financial stability board (FSB) report, shadow banks are defined as the entities which have financial intermediary activities, and their credit term or liquidity transformation function similar to traditional bank, but not to be regulated by the Basel Ⅲ regulation. This paper uses the definition of shadow banks by FSB. According to this definition, China’s shadow banks includes:securities investment fund, pension, housing provident fund, the petty loan company, bank financial product, pawn, guarantee corporation and so on. The main products of shadow banks are entrusted loans, financial products, trust products, private equity funds, securities investment funds, brokerage collection product and so on. In addition, China’s shadow banks includes the high-risk folk financing. In recent years, some folk financing institutions such as mortgage, guarantee and small loan companies emerge in the market, playing a function of providing loans.The shadow banks has started late in China, the development of asset securitization has lagged and the level of financial liberalization and innovation is low. Comparing with developed countries, the development of our shadow banks in China is lower and we do not have the basis of the shadow banking system abroad--highly developed derivatives markets so that the complexity of shadow banking system is much lower than developed countries. Shadow banks are independently relatively scattered and lack of coordination, so there is no unified shadow banking system in our country. But since2010, the development of the shadow banks has been rapid. The scale of trust loans, entrusted loans and private lending has expanded rapidly. By the end of2013, the RMB loans accounted for51.4%of the social financing scale, declining40.6%compared with the account in2002.At the same time, the amount of credit in shadow banks raise sharply, from8%in2002up to48.6%, which had a certain degree of impact on market liquidity. With the development of Internet technology, the Internet financial platform leads to the emergence of electronic products, bringing convenience to people’s life and solving the small and medium-sized enterprise financing difficult problem to some extent, but the risk is high. As the shadow banks play an essential role, the monetary policy making must take the shadow banks into consideration. Studying the effect of shadow Banks on the effectiveness of monetary policy is of great significance, which means it not only helps to recognize the influence of shadow banking on the modern financial system, but also helps to explore much more effective monetary policy tools to standardize the healthy development of the shadow banking. Above all, the study of the effect to monetary policy by shadow banks is helpful for policy making, improving the shadow banks and developing the economy.Many scholars studies about shadow banking related issues from many attitudes of theoretical and empirical at home and abroad. At present, foreign scholars have reached a consensus on the concept of shadow banks basically. Most of them have analyzed the problem of the shadow banking from the point of the U.S. financial crisis. Many scholars believe that the shadow banking is the product of financial innovation and regulation and the shadow banking system is a "double-edged sword" for the development of economic. On the one hand, the shadow banks have stimulated the economic prosperity. On the other hand, the shadow banks bring huge risk to the market. Foreign scholars focus the study on the analysis of the credit creation mechanism and the challenges to monetary policy. Unlike foreign literatures, the Chinese scholars have not reached a consensus on the connotation of the shadow banking. But on the influence of shadow banking system on monetary policy, the domestic scholars agree that the development of shadow banking has a certain degree of influence on monetary policy. The papers about the development of the shadow banking on monetary policy effectiveness focus on the influence of shadow banks to credit transmission mechanism of monetary policy at home and abroad, from the perspective of shadow banking credit creation mode. But there are few literatures about the issues of the effects of shadow banks to the interest rates transmission mechanism of monetary policy. In addition, the literatures do not cover the effects of shadow banks to the monetary policy transmission mechanism of risk and there is no separate paper of the influence of shadow banking to monetary policy tools. Above all, most of the literatures only focus on one aspect of the influence of shadow banks to monetary policy and there is no specific, systematic and comprehensive research.This paper makes comprehensive analysis of the influence of the shadow banking system on the effectiveness of monetary policy on the basis of the situation of our country. Therefore, the paper is divided into five chapters based on the theoretical and empirical study.The first chapter illustrates the background and meaning, including the research contents, methods, the problems, interpreting the background and the definition of the shadow banking system. The second chapter mainly summarizes the literature review about the effectiveness of monetary policy and the influence of shadow banks, absorbing predecessors’ excellent research results to get a useful reference for this paper.The third chapter analyzes the influence of shadow banks to the monetary policy in theory, including credit creation function of shadow banks, monetary policy transmission mechanism, the impact of shadow banks on monetary policy objectives and so on. And the logical structure of the third chapter is as follows: first analyzes the operation mechanism of shadow banking and credit creation mode, including the development of the shadow banking system in our country and the evolution process of monetary policy, second from the aspects of monetary policy transmission mechanism, the policy effect and the money multiplier analyzes the impact of shadow banks on monetary policy. The fourth chapter is the empirical research part of this paper, on the basis of the previous theoretical analysis, this chapter studies the impact of shadow banking system on monetary policy about three aspects which are the credit transmission channels, monetary policy intermediary target and the ultimate goal. Besides, the chapter analyzes the influence of shadow banks to the monetary policy in empirical aspect, using the VEC model to analyze the impact of shadow banking system on the monetary policy. The empirical test includes the unit root test, Johansen cointegration test, VEC model, impulse response analysis and variance decomposition analysis. And the last chapter makes some suggestions, including enlarging the coverage of the legal deposit reserve, strengthening the regulation of the shadow banks, redefining the money supply and so on.Compared with previous literatures, there are three innovations in this paper which are the unique research perspective, the theoretical analysis and the empirical method. First, this paper analyses the effectiveness of monetary policy from the perspective of shadow banking system, including credit creation mode of the shadow banking system, the definition of effectiveness of monetary policy and monetary policy transmission mechanism. The monetary policy transmission mechanism contains the credit channel, interest rate channel, exchange rate channel, Tobin q and the wealth effect. Second, this paper analyzes the impact of the shadow banks on monetary policy transmission mechanism, the intermediary target and the influence of the ultimate goal in theory, based on the definition and the effectiveness of the monetary policy transmission mechanism and the credit creation mode of shadow banking system. From theoretical analysis, we can see that the shadow banking system has weakened the control of central bank to the liquidity of the market and has revised the money multiplier, reducing the measurability and controllability of monetary policy intermediary target and interfering the monetary policy transmission. Third, this paper analyses the influences of the shadow banking system on the monetary policy with the combination of theory and empirical method. This paper chooses the VEC model in empirical study, including the research contents, methods and the problems, interpreting the background and the definition of shadow banking. The empirical test comes to some meaningful conclusions which are that the expansion of the shadow banking increases the difficulty of the central bank to contain inflation, rises the real money supply and will compete with the commercial banks. Moreover, there is a certain extent of negative impact of shadow banks to the credit expansion of commercial Banks and the effect of monetary policy credit transmission channel would decline since the shadow banks put a shock to the credit of commercial banks.With the study of the impact of the shadow banks to the monetary policy, I think the shadow banks have a significant influence on the monetary policy so that the center bank should improve the policy with the consideration of shadow banks. Therefore, based on the theoretical and empirical analysis, the paper puts forward some meaningful suggestions. First, the center bank should improve the use of monetary policy with the development of the shadow banking, enlarging the coverage of the legal deposit reserve policy and redefining statistical caliber of the money supply. Second, the regulator should encourage the development of the shadow banking system healthily, strengthen the regulation of shadow banking system, to prevent the risk. Third, the central bank should innovate monetary policy tools, take the use of monetary policy price tools, play its artistry and promote market-oriented interest rate process.