This paper researches into development of China’s shadow banking during 2020-2022, a special period marked by COVID-19 and strengthened global regulation on Non-Bank Financial Intermediation (NBFI). Research focus includes balance sheet evolvement, growth dynamics, and relation with macro-finance. Its business model surprisingly resembles western peers. They both fund underserved sectors and have similar exposure to balance sheet mismatch. Massive holding of bond investment (36.6% of total asset) is funded by uninsured interbank fund and wealth management product, which makes it more closely related with banks’ balance sheet and risk contagion from NBFI to traditional commercial banks more easily. This paper then re-summarizes growth dynamics of China’s shadow banking in a “Pull-Push” framework, and proposes concept of reintermediation in respective to disintermediation. Consecutive regulation on NBFI and real estate sector kept dragging on growth of shadow banking, and rendered it in liquidity surplus, which is invested into interbank market. This paper also provides empirical evidence on relation of China’s shadow banking with macro-finance, and notes several empirical breakdowns of pre- COVID relations among economic and financial indicators. Most important breakdown is the non-functionality of monetary policy transmission channel. Besides, it continued to twist de facto financial regulatory indicators, however with fading impact.

We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes that experience an unprecedented relative growth in mortgage credit from 2002 to 2005. This expansion in mortgage credit to subprime zip codes occurs despite sharply declining relative (and in some cases absolute) income growth in these neighborhoods. In fact, 2002 to 2005 is the only period in the last 18 years when income and mortgage credit growth are negatively correlated. We show that the expansion in mortgage credit to subprime zip codes and its dissociation from income growth is closely correlated with the increase in securitization of subprime mortgages. Finally, we show that all of our key findings hold in markets with very elastic housing supply that have low house price growth during the credit expansion years. Overall, our findings favor a supply-based explanation for credit expansion over income-based or house price expectations-based hypotheses.