Interconnections and interdependencies of economic development and shadow banking sector in developing and transitional economies
Abstract
The research objective is defined as the identification and confirmation of empirical relationships between shadow banking activities and economic development in developing and transitional economies to establish a theoretical basis for minimizing potential risks associated with shadow banking. The methodological design is based on a quantitative approach, implemented through correlation-regression analysis and ARIMA forecasting methods. The research findings confirm Hypothesis 1: China’s shadow banking is closely interconnected with the country’s economic development. However, Hypothesis 2 (the reduction of shadow banking in China contributes to per capita GDP growth) is only supported for specific structural elements of shadow banking that contribute to economic overheating. In contrast, for other structural elements, such as entrusted loans, a strong direct correlation exists, promoting a positive impact of shadow banking on the country’s economic development. This highlights the need for a highly balanced state policy to minimize shadow banking risks. The research results can be valuable for professionals in public administration and academic researchers, particularly in terms of shaping future research directions.
Keyword : banking system, correlation, entrusted loans, regression, shadow banking
How to Cite
Liang, Y., Jin, X., & Azimzadeh, A. J. (2024). Interconnections and interdependencies of economic development and shadow banking sector in developing and transitional economies. Technological and Economic Development of Economy, 30(5), 1392–1411. https://doi.org/10.3846/tede.2024.20795
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Allen, F., & Gu, X. (2021). Shadow banking in China compared to other countries. The Manchester School, 89(5), 407–419. https://doi.org/10.1111/manc.12331
Alqodsi, E. M. (2021). The right to pre-contractual information in e-commerce consumer contracts: UAE law and comparative perspectives. Journal of Legal, Ethical and Regulatory Issues, 24(2), 1.
Anagnostopoulos, I. (2018). Fintech and regtech: Impact on regulators and banks. Journal of Economics and Business, 100, 7–25. https://doi.org/10.1016/j.jeconbus.2018.07.003
Arora, R. U., & Zhang, Q. (2019). Banking in the shadows: A comparative study of China and India. Asia-Pacific Economic History Review, 59(1), 103–131. https://doi.org/10.1111/aehr.12167
Avgouleas, E., & Xu, D. (2017). Overhauling China’s financial stability regulation: Policy riddles and regulatory dilemmas. Asian Journal of Law and Society, 4(1), 1–57. https://doi.org/10.1017/als.2017.3
Baumgärtner, M., & Klose, J. (2021). Why central banks announcing liquidity injections is more effective than forward guidance. International Finance, 24(2), 236–256. https://doi.org/10.1111/infi.12389
Bock, H. G., Gutekunst, J., Potschka, A., & Garcés, M. E. S. (2020). A flow perspective on nonlinear least-squares problems. Vietnam Journal of Mathematics, 48(4), 987–1003. https://doi.org/10.1007/s10013-020-00441-z
Carvalho, D. (2021). Revisiting the relationship between cross‐border capital flows and credit. International Finance, 24(2), 179–218. https://doi.org/10.1111/infi.12388
Chen, K., Ren, J., & Zha, T. (2018). The nexus of monetary policy and shadow banking in China. American Economic Review, 108(12), 3891–3936. https://doi.org/10.1257/aer.20170133
Chen, Z., He, Z., & Liu, C. (2020). The financing of local government in China: Stimulus loan wanes and shadow banking waxes. Journal of Financial Economics, 137(1), 42–71. https://doi.org/10.1016/j.jfineco.2019.07.009
Claessens S., Pozsar Z., Ratnovski L., & Singh M. (2012). Shadow banking: Economics and policy. SSRN. https://doi.org/10.2139/ssrn.2187661
Elliott, D., Kroeber, A., & Qiao, Y. (2015). Shadow banking in China: A primer. Economic Studies at Brookings, 3, 1–7.
Fang, S., Qian, X., & Zou, W. (2020). The empirical relation between loan risk and collateral in the shadow banking system: Evidence from China’s entrusted loan market. International Review of Economics & Finance, 67, 42–54. https://doi.org/10.1016/j.iref.2019.12.012
Financial Stability Board. (2011). Shadow banking: Strengthening oversight and regulation. Recommendations of the Financial Stability Board. Bank for International Settlements, Basel. https://www.fsb.org/wp-content/uploads/r_111027a.pdf?page_moved=1
Fong, T. P. W., Sze, A. K. W., & Ho, E. H. C. (2021). Assessing cross-border interconnectedness between shadow banking systems. Journal of International Money and Finance, 110, Article 102278. https://doi.org/10.1016/j.jimonfin.2020.102278
Gabor, D. (2018). Goodbye (Chinese) shadow banking, hello market‐based finance. Development and Change, 49(2), 394–419. https://doi.org/10.1111/dech.12387
Hachem, K. (2018). Shadow banking in China. Annual Review of Financial Economics, 10, 287–308. https://doi.org/10.1146/annurev-financial-110217-023025
Hadigol, M., & Doostan, A. (2018). Least squares polynomial chaos expansion: A review of sampling strategies. Computer Methods in Applied Mechanics and Engineering, 332, 382–407. https://doi.org/10.1016/j.cma.2017.12.019
Hou, X., Li, S., Guo, P., & Wang, Q. (2018). The cost effects of shadow banking activities and political intervention: Evidence from the banking sector in China. International Review of Economics & Finance, 57, 307–318. https://doi.org/10.1016/j.iref.2018.01.019
Jiang, Y., & Fang, X. (2022). Responses of China’s shadow banking system to exogenous shocks. Applied Economics, 54(6), 615–632. https://doi.org/10.1080/00036846.2021.1967864
Łasak, P., Szyszko, A., & Pagacz, P. (2019). The interconnectedness between traditional banks, shadow banking and non-performing loans in the Chinese economy. Bank & Credit, 50(4), 347–374.
Le, V. P. M., Matthews, K., Meenagh, D., Minford, P., & Xiao, Z. (2021). China’s market economy, shadow banking and the frequency of growth slowdown. The Manchester School, 89(5), 420–444. https://doi.org/10.1111/manc.12318
Lin, J. H., Chen, S., & Huang, F.-W. (2018). Bank interest margin, multiple shadow banking activities, and capital regulation. International Journal of Financial Studies, 6(3), Article 63. https://doi.org/10.3390/ijfs6030063
Liu, K. (2019). Chinese shadow banking: The case of trust funds. Journal of Economic Issues, 53(4), 1070–1087. https://doi.org/10.1080/00213624.2019.1668338
Macrotrends LLC. (2022). China GDP growth rate 1961–2022. https://www.macrotrends.net/countries/CHN/china/gdp-growth-rate
Milic, D. (2021). The impact of non-banking financial institutions on monetary policy transmission in Euro area. Empirical Economics, 61, 1779–1817. https://doi.org/10.1007/s00181-020-01927-y
Moody’s Investors Service. (2022). China shadow banking monitor. https://www.moodys.com/search?keyword=China%20Shadow%20Banking%20Monitor%202020
Nath, R. D., & Chowdhury, M. A. F. (2021). Shadow banking: A bibliometric and content analysis. Financial Innovation, 7(1), Article 63. https://doi.org/10.1186/s40854-021-00286-6
Omotubora, A., & Basu, S. (2018). Regulation for e-payment systems: Analytical approaches beyond private ordering. Journal of African Law, 62(2), 281–313. https://doi.org/10.1017/S0021855318000104
Pellegrini, C. B., Cincinelli, P., Meoli, M., & Urga, G. (2022). The contribution of (shadow) banks and real estate to systemic risk in China. Journal of Financial Stability, 60, Article 101018. https://doi.org/10.1016/j.jfs.2022.101018
People’s Bank of China. (2013). China financial stability report. http://www.pbc.gov.cn/english/130736/2869239/index.html
Petry, J. (2020). Financialization with Chinese characteristics? Exchanges, control and capital markets in authoritarian capitalism. Economy and Society, 49(2), 213–238. https://doi.org/10.1080/03085147.2020.1718913
Pozsar, Z., Adrian, T., Ashcraft, A., & Boesky, H. (2012). Shadow banking (Staff Report No. 458). Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr458.pdf
Rahman, A. M., & Islam, S. (2022). Can Voluntary Insurance ensure risk-free digital-banking in Chinese-economy: Seeking attentions? Journal of Chinese Economic and Business Studies, 20(2), 139–158. https://doi.org/10.1080/14765284.2021.1929792
Sever, C. (2022). Financial structure convergence. International Finance, 25(1), 65–83. https://doi.org/10.1111/infi.12403
Shah, S. M. R., Fu, Q., Abbas, G., & Arshad, M. U. (2023). Shadow banking from China’s perspective: An empirical analysis of bank-issued wealth management products. Journal of Economic and Administrative Sciences, 39(1), 1–24. https://doi.org/10.1108/JEAS-09-2020-0160
Sun, G. (2019). China’s shadow banking: Bank’s shadow and traditional shadow banking (BIS Working Paper No. 822). SSRN. https://ssrn.com/abstract=3485213
Tan, Y. (2017). The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry. The North American Journal of Economics and Finance, 42, 89–106. https://doi.org/10.1016/j.najef.2017.07.007
Tsai, K. S. (2017). When shadow banking can be productive: Financing small and medium enterprises in China. The Journal of Development Studies, 53(12), 2005–2028. https://doi.org/10.1080/00220388.2016.1228877
Vasudevan, R. (2021). The evolution of China’s monetary policy: On the horns of a dilemma. Review of Keynesian Economics, 9(1), 83–108. https://doi.org/10.4337/roke.2021.01.05
Wang, R., Liu, J., & Luo, H. (2021). Fintech development and bank risk taking in China. The European Journal of Finance, 27(4–5), 397–418. https://doi.org/10.1080/1351847X.2020.1805782
Wang, X., Qiao, S., Shen, C. H., Wu, M. W., & Wang, J. (2022). Effect of shadow banking activities on firm risk and performance: Entrusted loan evidence from Chinese listed firms. Asia‐Pacific Journal of Financial Studies, 51(2), 256–290. https://doi.org/10.1111/ajfs.12367
Woyames Dreher, V. (2020). Divergent effects of international regulatory institutions. Regulating global banks and shadow banking after the global financial crisis of 2007–2009. Review of International Political Economy, 27(3), 556–582. https://doi.org/10.1080/09692290.2019.1675743
Wu, F. (2023). The long shadow of the state: Financializing the Chinese city. Urban Geography, 44(1), 37–58. https://doi.org/10.1080/02723638.2021.1959779
Wu, M. W., & Shen, C. H. (2019). Effects of shadow banking on bank risks from the view of capital adequacy. International Review of Economics & Finance, 63, 176–197. https://doi.org/10.1016/j.iref.2018.09.004
Wu, M. W., Xu, L., Shen, C. H., & Zhang, K. K. (2021). Overconfident CEOs and shadow banking in China. Pacific-Basin Finance Journal, 65, Article 101488. https://doi.org/10.1016/j.pacfin.2020.101488
Yang, L., van Wijnbergen, S., Qi, X., & Yi, Y. (2019). Chinese shadow banking, financial regulation and effectiveness of monetary policy. Pacific-Basin Finance Journal, 57, Article 101169. https://doi.org/10.1016/j.pacfin.2019.06.016
Zhang, S., & Wan, J. (2017). Do China’s shadow banking interest rates capture its monetary policy stance? Emerging Markets Finance and Trade, 53(12), 2686–2695. https://doi.org/10.1080/1540496X.2017.1377067
Zhu, F., Chen, J., Chen, Z., & Li, H. (2019). Shadow banking shadowed in banks’ balance sheets: Evidence from China’s commercial banks. Accounting & Finance, 59(5), 2879–2903. https://doi.org/10.1111/acfi.12558
Alqodsi, E. M. (2021). The right to pre-contractual information in e-commerce consumer contracts: UAE law and comparative perspectives. Journal of Legal, Ethical and Regulatory Issues, 24(2), 1.
Anagnostopoulos, I. (2018). Fintech and regtech: Impact on regulators and banks. Journal of Economics and Business, 100, 7–25. https://doi.org/10.1016/j.jeconbus.2018.07.003
Arora, R. U., & Zhang, Q. (2019). Banking in the shadows: A comparative study of China and India. Asia-Pacific Economic History Review, 59(1), 103–131. https://doi.org/10.1111/aehr.12167
Avgouleas, E., & Xu, D. (2017). Overhauling China’s financial stability regulation: Policy riddles and regulatory dilemmas. Asian Journal of Law and Society, 4(1), 1–57. https://doi.org/10.1017/als.2017.3
Baumgärtner, M., & Klose, J. (2021). Why central banks announcing liquidity injections is more effective than forward guidance. International Finance, 24(2), 236–256. https://doi.org/10.1111/infi.12389
Bock, H. G., Gutekunst, J., Potschka, A., & Garcés, M. E. S. (2020). A flow perspective on nonlinear least-squares problems. Vietnam Journal of Mathematics, 48(4), 987–1003. https://doi.org/10.1007/s10013-020-00441-z
Carvalho, D. (2021). Revisiting the relationship between cross‐border capital flows and credit. International Finance, 24(2), 179–218. https://doi.org/10.1111/infi.12388
Chen, K., Ren, J., & Zha, T. (2018). The nexus of monetary policy and shadow banking in China. American Economic Review, 108(12), 3891–3936. https://doi.org/10.1257/aer.20170133
Chen, Z., He, Z., & Liu, C. (2020). The financing of local government in China: Stimulus loan wanes and shadow banking waxes. Journal of Financial Economics, 137(1), 42–71. https://doi.org/10.1016/j.jfineco.2019.07.009
Claessens S., Pozsar Z., Ratnovski L., & Singh M. (2012). Shadow banking: Economics and policy. SSRN. https://doi.org/10.2139/ssrn.2187661
Elliott, D., Kroeber, A., & Qiao, Y. (2015). Shadow banking in China: A primer. Economic Studies at Brookings, 3, 1–7.
Fang, S., Qian, X., & Zou, W. (2020). The empirical relation between loan risk and collateral in the shadow banking system: Evidence from China’s entrusted loan market. International Review of Economics & Finance, 67, 42–54. https://doi.org/10.1016/j.iref.2019.12.012
Financial Stability Board. (2011). Shadow banking: Strengthening oversight and regulation. Recommendations of the Financial Stability Board. Bank for International Settlements, Basel. https://www.fsb.org/wp-content/uploads/r_111027a.pdf?page_moved=1
Fong, T. P. W., Sze, A. K. W., & Ho, E. H. C. (2021). Assessing cross-border interconnectedness between shadow banking systems. Journal of International Money and Finance, 110, Article 102278. https://doi.org/10.1016/j.jimonfin.2020.102278
Gabor, D. (2018). Goodbye (Chinese) shadow banking, hello market‐based finance. Development and Change, 49(2), 394–419. https://doi.org/10.1111/dech.12387
Hachem, K. (2018). Shadow banking in China. Annual Review of Financial Economics, 10, 287–308. https://doi.org/10.1146/annurev-financial-110217-023025
Hadigol, M., & Doostan, A. (2018). Least squares polynomial chaos expansion: A review of sampling strategies. Computer Methods in Applied Mechanics and Engineering, 332, 382–407. https://doi.org/10.1016/j.cma.2017.12.019
Hou, X., Li, S., Guo, P., & Wang, Q. (2018). The cost effects of shadow banking activities and political intervention: Evidence from the banking sector in China. International Review of Economics & Finance, 57, 307–318. https://doi.org/10.1016/j.iref.2018.01.019
Jiang, Y., & Fang, X. (2022). Responses of China’s shadow banking system to exogenous shocks. Applied Economics, 54(6), 615–632. https://doi.org/10.1080/00036846.2021.1967864
Łasak, P., Szyszko, A., & Pagacz, P. (2019). The interconnectedness between traditional banks, shadow banking and non-performing loans in the Chinese economy. Bank & Credit, 50(4), 347–374.
Le, V. P. M., Matthews, K., Meenagh, D., Minford, P., & Xiao, Z. (2021). China’s market economy, shadow banking and the frequency of growth slowdown. The Manchester School, 89(5), 420–444. https://doi.org/10.1111/manc.12318
Lin, J. H., Chen, S., & Huang, F.-W. (2018). Bank interest margin, multiple shadow banking activities, and capital regulation. International Journal of Financial Studies, 6(3), Article 63. https://doi.org/10.3390/ijfs6030063
Liu, K. (2019). Chinese shadow banking: The case of trust funds. Journal of Economic Issues, 53(4), 1070–1087. https://doi.org/10.1080/00213624.2019.1668338
Macrotrends LLC. (2022). China GDP growth rate 1961–2022. https://www.macrotrends.net/countries/CHN/china/gdp-growth-rate
Milic, D. (2021). The impact of non-banking financial institutions on monetary policy transmission in Euro area. Empirical Economics, 61, 1779–1817. https://doi.org/10.1007/s00181-020-01927-y
Moody’s Investors Service. (2022). China shadow banking monitor. https://www.moodys.com/search?keyword=China%20Shadow%20Banking%20Monitor%202020
Nath, R. D., & Chowdhury, M. A. F. (2021). Shadow banking: A bibliometric and content analysis. Financial Innovation, 7(1), Article 63. https://doi.org/10.1186/s40854-021-00286-6
Omotubora, A., & Basu, S. (2018). Regulation for e-payment systems: Analytical approaches beyond private ordering. Journal of African Law, 62(2), 281–313. https://doi.org/10.1017/S0021855318000104
Pellegrini, C. B., Cincinelli, P., Meoli, M., & Urga, G. (2022). The contribution of (shadow) banks and real estate to systemic risk in China. Journal of Financial Stability, 60, Article 101018. https://doi.org/10.1016/j.jfs.2022.101018
People’s Bank of China. (2013). China financial stability report. http://www.pbc.gov.cn/english/130736/2869239/index.html
Petry, J. (2020). Financialization with Chinese characteristics? Exchanges, control and capital markets in authoritarian capitalism. Economy and Society, 49(2), 213–238. https://doi.org/10.1080/03085147.2020.1718913
Pozsar, Z., Adrian, T., Ashcraft, A., & Boesky, H. (2012). Shadow banking (Staff Report No. 458). Federal Reserve Bank of New York. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr458.pdf
Rahman, A. M., & Islam, S. (2022). Can Voluntary Insurance ensure risk-free digital-banking in Chinese-economy: Seeking attentions? Journal of Chinese Economic and Business Studies, 20(2), 139–158. https://doi.org/10.1080/14765284.2021.1929792
Sever, C. (2022). Financial structure convergence. International Finance, 25(1), 65–83. https://doi.org/10.1111/infi.12403
Shah, S. M. R., Fu, Q., Abbas, G., & Arshad, M. U. (2023). Shadow banking from China’s perspective: An empirical analysis of bank-issued wealth management products. Journal of Economic and Administrative Sciences, 39(1), 1–24. https://doi.org/10.1108/JEAS-09-2020-0160
Sun, G. (2019). China’s shadow banking: Bank’s shadow and traditional shadow banking (BIS Working Paper No. 822). SSRN. https://ssrn.com/abstract=3485213
Tan, Y. (2017). The impacts of competition and shadow banking on profitability: Evidence from the Chinese banking industry. The North American Journal of Economics and Finance, 42, 89–106. https://doi.org/10.1016/j.najef.2017.07.007
Tsai, K. S. (2017). When shadow banking can be productive: Financing small and medium enterprises in China. The Journal of Development Studies, 53(12), 2005–2028. https://doi.org/10.1080/00220388.2016.1228877
Vasudevan, R. (2021). The evolution of China’s monetary policy: On the horns of a dilemma. Review of Keynesian Economics, 9(1), 83–108. https://doi.org/10.4337/roke.2021.01.05
Wang, R., Liu, J., & Luo, H. (2021). Fintech development and bank risk taking in China. The European Journal of Finance, 27(4–5), 397–418. https://doi.org/10.1080/1351847X.2020.1805782
Wang, X., Qiao, S., Shen, C. H., Wu, M. W., & Wang, J. (2022). Effect of shadow banking activities on firm risk and performance: Entrusted loan evidence from Chinese listed firms. Asia‐Pacific Journal of Financial Studies, 51(2), 256–290. https://doi.org/10.1111/ajfs.12367
Woyames Dreher, V. (2020). Divergent effects of international regulatory institutions. Regulating global banks and shadow banking after the global financial crisis of 2007–2009. Review of International Political Economy, 27(3), 556–582. https://doi.org/10.1080/09692290.2019.1675743
Wu, F. (2023). The long shadow of the state: Financializing the Chinese city. Urban Geography, 44(1), 37–58. https://doi.org/10.1080/02723638.2021.1959779
Wu, M. W., & Shen, C. H. (2019). Effects of shadow banking on bank risks from the view of capital adequacy. International Review of Economics & Finance, 63, 176–197. https://doi.org/10.1016/j.iref.2018.09.004
Wu, M. W., Xu, L., Shen, C. H., & Zhang, K. K. (2021). Overconfident CEOs and shadow banking in China. Pacific-Basin Finance Journal, 65, Article 101488. https://doi.org/10.1016/j.pacfin.2020.101488
Yang, L., van Wijnbergen, S., Qi, X., & Yi, Y. (2019). Chinese shadow banking, financial regulation and effectiveness of monetary policy. Pacific-Basin Finance Journal, 57, Article 101169. https://doi.org/10.1016/j.pacfin.2019.06.016
Zhang, S., & Wan, J. (2017). Do China’s shadow banking interest rates capture its monetary policy stance? Emerging Markets Finance and Trade, 53(12), 2686–2695. https://doi.org/10.1080/1540496X.2017.1377067
Zhu, F., Chen, J., Chen, Z., & Li, H. (2019). Shadow banking shadowed in banks’ balance sheets: Evidence from China’s commercial banks. Accounting & Finance, 59(5), 2879–2903. https://doi.org/10.1111/acfi.12558