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not necessarily legal or illegal. A variety
of non-banking financing mechanisms
has been able to develop within the
complexity of China’s bureaucratic
system. If a credit facility is prohibited
under banking regulations, another
bureaucracy may have approved it.
She has categorized such non-
banking financial intermediation by
their degree of institutionalization.
This ranges from casual borrowing
among family and friends at the least
institutionalized end of the spectrum,
to registered non-banking financial
institutions at the other. In the middle
is a grey area of “semi-institutionalized
practices” that are documented but
unregulated. These include the rise of
financial technology (FinTech) and
online peer-to-peer platforms. Due to its
unregulated character, internet finance
is regarded as part of shadow banking in
China, and new financial technologies
have fueled shadow banking. By
2014, over 60% of the 675 million
internet users in China had used
online financing products.
Since the start of economic reform in
the late 1970s, China’s economy has
grown exponentially despite an initial
lack of private property rights, capitalism
without democracy, and a private sector
that has thrived without access to bank
credit. Both quantitative and qualitative
research by HKUST social scientists
have helped to unravel those paradoxes
through rigorous field studies in China
that go beyond publicly available
government statistics and reports.
Such research is challenging
generalizations and misconceptions
about China and providing fresh
insights into the country’s rise over the
past 40 years. One key area is the less
understood role of informal financing
institutions and resources. This includes
the role of a so-called “shadow banking”
system that started out as a means
to finance China’s petty private sector,
but has since expanded into all reaches
of the Chinese economy, including local
public finance, real estate development,
and investment vehicles for the growing
middle class.
Research conducted across the
country by political scientist Prof
Kellee Tsai has tracked how small and
medium-sized enterprises (SMEs) could
have risen so quickly to become the
most dynamic element of the country’s
economy, despite their lack of access to
bank credit lines. In 2010, state-owned
enterprises under the State-owned
Assets Supervision and Administrative
Commission constituted 62% of GDP.
However, by 2013, the private sector
accounted for 60% of GDP even though
the country’s banks have traditionally
confined the bulk of their lending to
the state-owned sector. Over 99% of
China’s firms are SMEs, yet state-affiliated
firms receive over 85% of loans extended
by state-owned commercial banks, she
has noted.
Prof Tsai, who joined HKUST from
Johns Hopkins University in 2013, was
one of the first academics to explore
the scale and significance of China’s
world of informal finance. In her
research stretching over 20 years,
INFORMAL LENDING POWER
Source: Wang, B.L. & Li, J.J. (2013). The size of
Chinese shadow banking, risk assessment and
supervision
.
Journal of Central University of
Finance & Economics
, 1(5), 20-25.
Other underground financing:
private
money houses, money brokers, business
association financing, online services, etc.
Asset-backed securities, repos,
& money market funds
Informal finance:
credit guarantee companies,
pawnshops, investment companies
Shadow banking activities in Big Four banks:
asset management, trusts, financial leasing
Wealth management products in trusts & banks
My overarching agenda
has been to identify
alternative and more
accurate ways of
understanding what’s
really going on in China’s
political economy
PROF KELLEE TSAI
Chair Professor and Head,
Division of Social Science
Distribution of
Shadow Banking
Assets (2012)
Total Assets: RMB 24-25 Trillion
she has conducted
interviews with over
900 entrepreneurs in
10 provinces and
municipalities to
understand how this
has happened and
written extensively
about China’s private
entrepreneurship and financing.
Her books on China’s political
economy include
Back-Alley Banking:
Private Entrepreneurs in China
(Cornell
University Press 2002);
Capitalism
Without Democracy: The Private Sector in
Contemporary China
(Cornell University
Press 2007);
and, most recently,
State
Capitalism, Institutional Adaptation, and
the Chinese Miracle,
the latter co-edited
with Prof Barry Naughton, UC San Diego
(Cambridge University Press 2015).
Prof Tsai’s extensive research has
shown that China’s informal finance is
2% - 4%
40 %
28 %
12% - 16%
12 %
