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China’s market economy, shadow banking and the frequency of growth slowdown

Le, Vo Phuong Mai ORCID:, Matthews, Kent ORCID:, Meenagh, David ORCID:, Minford, Anthony ORCID: and Xiao, Zhiguo 2021. China’s market economy, shadow banking and the frequency of growth slowdown. Manchester School 89 (5) , pp. 420-444. 10.1111/manc.12318

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The activity of the Shadow Banks in China has been the subject of considerable interest in recent years. Total shadow banking lending has reached over 60% of GDP and has grown faster than regular bank lending. It has been argued that unregulated shadow banking has fuelled a credit boom that poses a risk to the stability of the financial system. This paper estimates a model of the Chinese economy using a DSGE framework that accommodates a banking sector that isolates the effects of lending to the private sector including shadow bank lending. A refinement of the model allows for bank lending including lending by the shadow banks to affect the credit premium on private investment. The main finding is that while financial shocks are significant, it is real shocks that dominate. The model is used to simulate the frequency of growth slowdowns in China and concludes that these are more likely to be driven by real sector shocks rather than financial sector, including shadow bank shocks. This paper differs from other applications in its use of indirect inference to test the fitted model against a three-equation VAR of inflation, output gap and interest rate.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Additional Information: This is an open access article under the terms of the Creative Commons Attribution License
Publisher: Wiley-Blackwell
ISSN: 1463-6786
Funders: ESRC
Date of First Compliant Deposit: 16 April 2020
Date of Acceptance: 10 April 2020
Last Modified: 26 Nov 2022 13:19

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