Shadow Banking: China's Dual-Track Interest Rate Liberalization
61 Pages Posted: 14 May 2015 Last revised: 7 Oct 2019
Date Written: October 7, 2019
We provide a novel interpretation of shadow banking in China from the perspective of dual-track interest rate liberalization. Shadow banking leads to a Kaldor-Hicks improvement, if the gains from reducing the capital idleness and financing the more productive private enterprise (PE) outweigh the expected PE default loss. Pareto improvement is achieved, because the less productive state-owned enterprise (SOE) participates and gains in shadow banking by transferring bank credit to the PE. In the presence of credit misallocation favoring the SOE, full interest rate liberalization may not guarantee a Pareto improvement.
Keywords: Shadow banking, interest rate liberalization, dual-track reform, Kaldor-Hicks improvement, Pareto improvement
JEL Classification: G21, G23, G28, P21, P31, P34
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