Does Entrusted Loans Cover The Credit Shortage In China?

Using samples of entrusted loans,this paper investigates how entrusted loans work in China from the perspective of formal credit cycle.The paper shows that entrusted loan,one type of shadow banking,is a market reaction to credit shortage: firms are more likely to participate in entrusted loans and issue more loans when credit crunch.On one hand,the monthly average new increment of loans increased by 33.54% in average during the credit crunch,according to the data of social financing scale;On the other hand,the probability of issuing loans significantly increases when credit crunch,as well as the scale.Further evidence shows that,on one hand,the probability and the size of loans borrowed by non-state-owned enterprises are significantly increased when credit crunch;on the other hand,entrusted loans tend to flow to the province who has bigger credit shortage when credit crunch.These results indicate that entrusted loan is a market solution to credit shortage.It not only mitigates financial constraints of firms outside the system,but also covers credit shortage of regional economic development.This paper sheds light on study of entrusted loans and helps us to understand the role of entrusted loans in China.In addition,there are also some important policy implications.First,we not only need to pay attention to the potential risks of entrusted loans,but also recognize its positive side.Second,in order to increase the effectiveness of monetary policy,authorities should attach more attention to the shadow banking in the process of formulating and implementing monetary policy and try to incorporate it into the monetary policy target system.