Entrusted Loans: A Close Look at China's Shadow Banking System

60 Pages Posted: 22 Jun 2015 Last revised: 15 Jun 2019

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Yiming Qian

University of Connecticut

Guoqian Tu

Chongqing University

Frank Yu

China Europe International Business School

Multiple version iconThere are 2 versions of this paper

Date Written: March 22, 2018

Abstract

We perform transaction-level analyses of entrusted loans—one of the largest components of shadow banking in China. Entrusted loans involve firms with privileged access to cheap capital channeling funds to less privileged firms, and increase when credit is tight. Nonaffiliated loans have much higher interest rates than both affiliated loans and official bank loans, and largely flow into real estate. The pricing of entrusted loans—especially of nonaffiliated loans—incorporates fundamental and informational risks. Stock market reactions suggest that both affiliated and nonaffiliated loans are fairly compensated investments.

Keywords: shadow banking, entrusted loans, credit shortage, fundamental risk, informational risk

JEL Classification: G23, G28

Suggested Citation

Allen, Franklin and Qian, Yiming and Tu, Guoqian and Yu, Fang, Entrusted Loans: A Close Look at China's Shadow Banking System (March 22, 2018). Journal of Financial Economics (JFE), 2019. Available at SSRN: https://ssrn.com/abstract=2621330 or http://dx.doi.org/10.2139/ssrn.2621330

Franklin Allen

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Yiming Qian (Contact Author)

University of Connecticut ( email )

2100 Hillside Road U-1041F, Room 452
Storrs, CT 06269
United States
860-486-2774 (Phone)

Guoqian Tu

Chongqing University ( email )

No. 174 Shazhengjie, Shapingba
Chongqing
China
15025355091 (Phone)

Fang Yu

China Europe International Business School ( email )

669 Hongfeng Road
Pudong
Shanghai, 201206
China

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