Entrusted Loans: A Close Look at China's Shadow Banking System
60 Pages Posted: 22 Jun 2015 Last revised: 15 Jun 2019
Date Written: March 22, 2018
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
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