This study explores the price drivers of Chinese Emissions Allowances (CEAs) in the early stage of China’s national carbon market. Using daily time series data from July 2021 to July 2023, we find limited influence from conventional drivers, including energy prices and economic factors. Instead, national power generation emerges as a significant driver. These are primarily due to the distinct institutional features of China’s national carbon market, notably its rate-based system and sectoral coverage. Moreover, the study uncovers cumulative abnormal volatility in CEA prices ranging from 12% to 20% around the end of the first compliance cycle, reflecting sentiments about the policy design and participants’ limited understanding about carbon trading. Our results extend previous literature regarding carbon pricing determinants by highlighting China’s unique carbon market design, comparing it with the traditional cap-and-trade programs, and offering valuable insights for tailored market-based policies in developing countries.

In reality, we find assets traded in the transparent centralized market and opaque decentralized market. To explain the traders' choices of venues, we develop a model of dynamic learning and dynamic market choice between the centralized market and decentralized markets. With heterogeneous trader value correlation, we find that when asset sensitivity or volatility is sufficiently low, traders prefer the decentralized market; when asset sensitivity or volatility is intermediate, switching between centralized and decentralized markets can be the optimal market choice; when asset values are sensitive to volatile fundamentals, assets are traded only in the centralized market. We provide empirical evidence in support of the model predictions. We discussed the welfare implications of various market designs under endogenous market choices. We find that introducing post-trade transparency in the decentralized market improves welfare. Surprisingly, introducing pre-trade transparency in the decentralized market may decrease welfare as it increases traders' incentives to choose a decentralized market earlier and hurts future traders in the centralized market.

We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests that shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy.

This chapter introduces alternative financial institutions (AFIs) in China that do not fall within traditional financial institution (FI) models. We describe their business models and development dynamics in the context of economic and financial reforms and technological advancement. We find that various AFIs are formed based on social, business, and virtual networks to overcome capital allocation barriers, reduce costs, or improve efficiency, providing financial services for the underserved. However, without proper regulations, these AFIs could pose alarming levels of risk on financial stability. They repeat a boom-and-bust pattern, in parallel with the government's initial laissez faire approach but later harsh interferences: being taken over by formal FIs or shut down as illegal practices until the exceptional Ant-Financial case. Improving investors' financial knowledge and regulators’ competency is critical for China to advance its financial system and develop mature FIs and AFIs. We recommend key features required in such a regulatory framework.

We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy