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.

Understanding the impacts of new technology and innovations on the banking sector is important and of growing interest. However, there is limited research on the detailed channels of the impacts, and consequently, the evaluations for the aggregate welfare impacts. We contribute both empirically and quantitatively. We construct a new data set for Chinese banks. We ffnd banking innovations can improve efficiency, and mostly reduce non-interest costs but not so much on deposit rates. We show the ffnding is quite robust under a battery of checks. In a new structural, quantitative model, banks have heterogeneous capital, decide innovation investment and also risky lending, face regulations on the capital requirement and have limited liability. When aggregate new technology improves, it can reduce financial intermediation costs and social deadweight loss; however, it will also change the bank’s risk consideration and increases moral hazard when the cost is largely reduced. We also find several other new implications for R&D investment credit policy and Capital Requirement policy (CAR).

We document a novel platform effect caused by the emergence of FinTech platforms in financial intermediation. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered entrance of funds onto platforms, we find a marked increase of performance-chasing, driven by the centralized information flow unique to FinTech platforms. This pattern is further confirmed using proprietary data from a top platform. Examining the platform impact on fund managers, we find that, incentivized by the amplified performance-chasing, fund managers increase risk taking to enhance their probability of getting onto the top ranking.

This paper studies the economic impact of the emergence of FinTech platforms on financial intermediation. In China, platform distributions of mutual funds emerged in 2012 and grew quickly into a formidable presence. Utilizing the staggered fund entrance onto platforms, we find markedly increased flow sensitivities to performance. Akin to the winner-take-all phenomenon in the platform economy, net flow captured by top 10% performing funds more than triples its pre-platform level. This pattern of platform-induced performance chasing is further confirmed using private data from Howbuy, a top platform in China. Consistent with this added incentive of becoming top performers in the era of large-scale platforms, fund managers increase risk taking to enhance the probability of becoming top performers. Meanwhile, organizational cohesiveness of fund families weakens as platforms level the playing field for all funds.

Using annual time series data (1978-2010), the present paper examines the nexus between financial intermediation development and economic fluctuation in China. The time series properties of the data are analyzed by bounds testing approach, ARDL model and vector error-correction model. The empirical results show that, there is long-term negative equilibrium relationship between financial intermediation development and economic fluctuation margin. However, although the short-term dynamics of volatility in economy growth can make adjustments in light of the long-term equilibrium relationship, it is not enough for economic fluctuation margin to revert to the equilibrium only through the error correction mechanism. Meanwhile, using the Granger causality test based on error correction model, the present paper finds the empirical evidence to support unidirectional Granger causality from financial intermediation development to economic fluctuation margin.

Modern financial development theories suggest that, financial development can promote technological progress and long-term economic growth. Based on the Chinese mainland provincial panel data, the paper tests empirically the relation between financial intermediation development and total factor productivity growth. In terms of the degree-of-freedom of bank loan decision-making, the ratio of loans of private enterprises and individuals to total loans is used to measure the development of Chinese financial intermediation. This paper finds that financial intermediation development significantly promotes total factor productivity growth when controlling for other variables, such as capital formation rate, foreign direct investment, government intervention and the urbanization level

Building on the important study by Allen, Qian and Qian (2005) and Ayyagari, Demirgüc-Kunt and Maksimovic (2010), I examine whether third party guarantors play an effective role in assessing loan risk. Using a proprietary database of third party loan guarantees in China, I find strong evidence that guarantors and banks disagree on pricing loan risk, and that banks can better predict loan defaults than guarantors. I also find that the probability of loan default is affected by the capability of guarantor officers. My findings question the contribution of soft information in the improvement of credit scoring and support the view that informal finance should be limited. This paper also supports the implications of studies on human capital in financial intermediation.

A model of the domestic financial intermediation of foreign capital inflows based on agency costs is developed for studying financial crises in emerging markets. In equilibrium, the banking system becomes progressively more fragile under imperfect prudential regulation and public sector loan guarantees until a crisis occurs with a sudden reversal of capital flows. The crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of loans after idiosyncratic firm-specific revenue shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, corporate debt and equity values in an endogenous growth model The model's assumptions and implications for the behavior of the economy before and after crisis are compared to the experience of five East Asian economies. The case studies compare three that suffered a crisis or near-crisis, Thailand and Malaysia, to two that did not, Taiwan Province of China and Singapore, and lend support to the model.

Chinese banks generate large profits and have relatively low nonperforming loans. However, good financial performance does not, in itself, guarantee that banks efficiently intermediate the economy’s financial resources. This paper first examines how efficient Chinese banks are in financial intermediation, using the stochastic production frontier approach. Quality of loans are controlled for by focusing on net loans and correcting for nonperforming loans; Hong Kong SAR banks are included in the sample to have a more universally representative production frontier. The results suggest that Chinese banks indeed became more efficient during 2001–07. Nevertheless, a majority of banks remain quite inefficient, including several large state owned banks and many city banks. Large banks tend to hoard deposits and operate beyond the point of diminishing returns to scale, while smaller banks operate at increasing returns to scale. This suggests that reallocating deposits from large to smaller banks would increase overall efficiency. The paper finds no significant correlation between bank efficiency and profitability. Possible factors leading to large profits in the banking system, despite wide-spread inefficiencies, are low deposit interest rates, large interest margins, and high market concentration. Moving to indirect monetary policy and deepening capital markets to channel some of the savings to productive investment would help improve the efficiency of financial intermediation. This may spur loan growth, however, which will need to be handled with monetary policy and regulatory/supervisory tools.

This paper develops a model of private debt financing under inefficient financial intermediation. It suggests a mechanism that can generate the following sequence of events observed in the recent Asian crisis: A period of relatively low capital flow despite a steady improvement in economic fundamentals (capital inflow inertia), followed by a fast buildup of capital inflow, and ended with a large capital outflow and domestic credit crunch. Unlike other models requiring large movements in fundamentals or asset prices to explain a financial crisis, this model can exhibit large credit/capital flow swings with moderate changes in the economic and market environment.