Finance Leases: A Hidden Channel of China’s Shadow Banking System

Abstract

By analyzing a hand-collected transaction-level dataset on the finance leases of China’s public firms for the period 2007-2019, this paper sheds light on China’s financial leasing industry. We find that banks use their affiliated leasing firms to provide credit to constrained clients in order to circumvent the government’s targeted monetary tightening policy, which offsets the expected decline in traditional bank loans in overcapacity industries and hampers the effectiveness of the monetary policy. Although this regulatory arbitrage may cause systemic risk at the macro level, bank-affiliated leasing firms exhibit much tighter risk control than other non-bank-affiliated leasing firms at the micro level, indicating that banks use finance leases as a channel to support their low-risk clients rather than to make excessive profit.

Keywords: Finance Lease, Shadow Banking, Relationship Lending, Regulation Arbitrage, Monetary Policy

JEL Classification: G23, G21, G28