Study On The Relationship Of Shadow Banking And Local Government Debt

Shadow banking system and local government debt are the two financial problems thathave caused great concern in China, because they both involve an enormous sum of money,any rupture of the chains of the two area will cause financial earthquake in China. Scholars athome and abroad have made some researches in different areas of the two fields, but it cannotbe ignored that shadow banking and local government debt are related to each other. Whenthe local government is unable to obtain sufficient quantities of bank loans, shadow bankingsystem will open up a newfinancing channel for local government, and local governmentprojects also provide a relatively safe and high yield investment area for shadow bankingsectors. However, due to the lack of supervision of both problems, they also hide substantialfinancial risks. Therefore, it is significant to study the correlation between the two problems.The innovation of this thesis is that, although domestic scholars have expressed concernsabout these two issues, but few people made specialized researches on the relationshipbetween shadow banking and local government debt. The thesis fills the gap of insufficientstudy of the relationship between the two issues theoretically and empirically. First,the thesisanalyzesthe possible link between the two problems from local government debt side and theshadow banking side respectively,and make a theoretical research on the dependency of sizeand risk of the two problems; then the thesismakesthe empirical test from four perspectives,using the yearly data from 1992 to 2012 and monthly data from March 2009 to March 2014 tomake time series regressions, and the data from different areas in China to make the crosssectionregression. From the empirical result, this thesis finds that, an increase in the size ofshadow banking does promote the growth of local government debt; the local governmentdebt also has a positive influence on the increase of shadow banking subdivisions trusts,financial products and entrusted loans; Small-loan company number and trusts scale have astrong positive correlation with local government debt in different areas, and make relevantpolicy recommendations for preventing risks from a regulatory point of view.