The Real Effects of Shadow Banking: evidence from China

59 Pages Posted: 3 Jun 2021 Last revised: 23 Sep 2023

See all articles by Xuan Tian

Xuan Tian

Tsinghua University - PBC School of Finance

Guoqian Tu

Chongqing University

Yichu Wang

Nottingham University Business School; University of Nottingham, Ningbo

Date Written: February 1, 2021


We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests that shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy.

Keywords: Shadow banking, Real effect, Capital reallocation, Innovation, China

JEL Classification: G23, G32, O17, O31

Suggested Citation

Tian, Xuan and Tu, Guoqian and Wang, Yichu, The Real Effects of Shadow Banking: evidence from China (February 1, 2021). Available at SSRN: or

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
+86-10-62794103 (Phone)


Guoqian Tu

Chongqing University ( email )

No. 174 Shazhengjie, Shapingba
15025355091 (Phone)

Yichu Wang

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

University of Nottingham, Ningbo ( email )

199 Taikang East Road
Ningbo, Zhejiang 315100

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