Shadow Banking: China's Dual-Track Interest Rate Liberalization

56 Pages Posted: 14 May 2015 Last revised: 12 Jun 2018

Hao Wang

Tsinghua University

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Lisheng Wang

The Chinese University of Hong Kong (CUHK) - Department of Economics

Hao Zhou

Tsinghua University - PBC School of Finance

Date Written: June 2018

Abstract

We provide a novel interpretation of shadow banking in China from the perspective of dual-track interest rate liberalization. Shadow banking leads to Kaldor-Hicks improvement, if the gains from reducing the capital idleness---due to ultra-high reserve requirement ratio---and from financing the private enterprise (PE)---with higher productivity than the state-owned enterprise (SOE)---outweigh the expected PE default loss. Pareto improvement is achieved, as the SOE participates and gains in shadow banking by transferring bank loan to the PE. In the presence of credit misallocation favoring the SOE, full interest rate liberalization does not guarantee Pareto improvement.

Keywords: Shadow banking, interest rate liberalization, dual-track reform, Kaldor-Hicks improvement, Pareto improvement

JEL Classification: G21, G23, G28, P21, P31, P34

Suggested Citation

Wang, Hao and Wang, Honglin and Wang, Lisheng and Zhou, Hao, Shadow Banking: China's Dual-Track Interest Rate Liberalization (June 2018). Available at SSRN: https://ssrn.com/abstract=2606081 or http://dx.doi.org/10.2139/ssrn.2606081

Hao Wang

Tsinghua University ( email )

318 Weilun Building
Tsinghua University
Beijing, 100084
China
86 10 62797482 (Phone)
86 10 62794554 (Fax)

Honglin Wang

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Lisheng Wang

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
86-10-62790655 (Phone)

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