R E S E A R C H @ H K U S T
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In addition, the concept of
“shadow banking” takes a different
form in the China context. While
shadow banking has been broadly
defined by the international Financial
Stability Board as “the system of credit
intermediation that involves entities
and activities fully or partially outside
the regular banking system, or non-bank
credit intermediation”, in China it
also includes local government debt –
involving fiscal authorities funding
infrastructure development through
lending to local governments – and
money market funds and wealth
management products issued by trust
companies connected to state banks.
Prof Tsai observes that China’s 2008
stimulus plan, launched in response to
the global financial crisis, incentivized
the rapid expansion of shadow banking
among government entities. Shadow
banking ranged from an estimated
26% to 69% of China’s entire GDP by
2012, and nearly half involved off-
balance sheet activities of official
state banks. Activities included asset
management and financial leasing
while the extension of loans to real
estate developers and private businesses
through trust companies helped to fuel
a real estate boom that some analysts
regard as a “bubble”.
More recent work on shadow
banking and SME finance has shown
that not all shadow banking poses a
risk to the banking system: “Some is
badly needed to supply SME credit,” she
said. It makes sense to legalize informal
financing selectively, and regulate it rather
than drive the business underground.
However, investors do need protection
through appropriate regulation.
China defies conventional academic
frameworks of political economy in
other ways, Prof Tsai said. One of the
most popular ideas in social science,
“modernization theory”, argues that
when a country’s GDP reaches a certain
level, a transition to democracy will
naturally follow. This is based on models
such as England’s experience following
the Industrial Revolution, whereby
capitalist development led to demands
for political representation. If private
entrepreneurs pay taxes, then they will
want to have a say in politics, according
to conventional thinking.
But China’s entrepreneurs have
had an impact on the political system
despite the lack of suffrage, according
to Prof Tsai’s research. She pointed to
major constitutional reforms legalizing
private enterprise and property, and
the toleration of informal lending
institutions. “The state has embraced
what is going on at grassroots level. It
has been strategically responsive, which
is one reason why China has managed to
provide a hospitable climate for capitalist
development without making a political
transition to liberal democracy.”
OVER
99%
of China’s firms are SMEs
CREDIT
COMPANY
LEAST INSTITUTIONALIZED
•
Interest-free uncollateralized lending
among friends, family, and businesses
•
Underground money lenders
(with high interest)
•
Trade credit among businesses
SEMI-INSTITUTIONALIZED
•
Internet finance (since 2007)
−
Peer-to-peer (P2P) platforms
−
Crowdfunding
•
Non-governmental investment alliances
•
Rotating savings and credit associations
• Reciprocal loan guarantee networks
INSTITUTIONALIZED
•
Microfinance/small loan companies
and credit guarantee companies
•
Leasing companies
•
Trust and investment companies
•
Mutual aid societies
•
Pawnshops
Forms of Non-banking Financial Intermediation
OVER
85%
of bank loans go to
state-affiliated firms
Quick cash from Wenzhou’s oldest pawnshop.
People shop from street vendors in Shanghai.
