China’s Shadow Banking System and Its Lurking Credit Crunch: Causes and Policy Options

  • René W. H. van der Linden
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)


In June 2013 the Chinese government and thereby the People’s Bank of China (PBC) shocked the world markets by refusing to lend out money any further to Chinese banks, therefore causing turmoil on the Chinese interbank market. This so-called Shanghai interbank offered rate (Shibor) crisis made it clear that the PBC was not willing to provide unlimited liquidity after China’s money supply far outpaced its GDP growth for more than a decade. Although the government has set a new annual GDP target at 7.5 per cent over the period 2011–15, it keeps investing in order to hold the GDP growth, and as a result China’s debt burden is rising — not just the absolute amount of debt in the economy, but also the annual cost of servicing that debt relative to its GDP. After the credit crisis in 2007–08, the aggressive stimulus measures to boost economic activity required the authorities to relax controls on local government spending programs, and since then China’s credit and debt ratio expanded much faster than its GDP growth. Currently China seems to be in a similar predicament to several of the developed economies prior to 2008, since too much credit has been created too quickly and too much money has been poured into investments that are unlikely to generate sufficient cash flows to pay off the debt. China’s stock of credit has soared to more than 200 per cent of GDP, having risen steeply over the past five years.


Interest Rate Default Risk Interbank Market Credit Crunch Credit Crisis 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Buitelaar, P. (2014) ‘Chinese banks — risks and challenges’, DNB Occasional Studies, 12(4): 1–51.Google Scholar
  2. CBRE Global Research and Consulting (2014) ‘China shadow banking and the real estate market’, Asia Pacific Special Report, June.Google Scholar
  3. Cecchetti, S.G., and K.L. Schoenholtz (2014) ‘The yin and the yang of shadow banking in China’, 8 September, available at Scholar
  4. CEIC (2014a) ‘China — Your map of the expanding credit universe’, On the Ground, 3 March, p. 10, available at
  5. CEIC (2014b) ‘China — The indebted’, On the Ground, 12 June, p. 9, available at
  6. Claessens, S., and L. Ratnovski (2014) ‘What is shadow banking?’, IMF Working Paper, WP/14/25, February.Google Scholar
  7. Financial Stability Board (2011) ‘Shadow banking: strengthening oversight and regulation’, Recommendations of the FSB, 27 October.Google Scholar
  8. Guilford, G. (2014) ‘Five charts to explain China’s shadow banking system, and how it could make a slowdown even uglier’, 20 February, available at
  9. Jacob, T. and C. Siepmann (2014) ‘Focal point: clean-up in the Chinese shadow banking system manageable’, Generali Investments Europe, 6 June.Google Scholar
  10. Jianjun Li and Sara Hsu (2013) ‘Shadow banking in China: institutional risks’, Political Economy Research Institute, University of Massachusetts Amherst, Working Paper Series, No. 334, August.Google Scholar
  11. KPMG (2011) ‘China’s 12th live-year plan: overview’, March, available at Scholar
  12. Linden, van der, R.W.H. (2010) ‘China’s macro-policy and regulatory framework of the financial sector to be tested by the global economic slowdown’ in F. Fiordelisi, P. Molyneux, and D. Previati (eds), New Issues in Financial and Credit Markets, Basingstoke: Palgrave Macmillan.Google Scholar
  13. Linden, vander, R.W.H. (2012) ‘China’s controlled potential property bubble and its economic slowdown: overview of cause and policy options’ in Joseph Falzon (ed.), Bank Performance, Risk and Securitisation, Basingstoke: Palgrave Macmillan.Google Scholar
  14. Lingling Wei and B. Davis (2013) ‘China’s “Shadow Banks” Fan Debt-Bubble Fears’, Wall Street Journal, 25 June.Google Scholar
  15. Lingling Wei, B. Davis, andGoogle Scholar
  16. Shen Hong (2014) ‘China tightens grip on shadow banks’, Wall Street Journal, 6 January.Google Scholar
  17. Manulile Asset Management (2014) ‘China’s shadow banking system: Orderly defaults ahead’, April.Google Scholar
  18. Mian, A., and A. Sufi (2014) ‘China and the dangers of debt’, House of Debt, The University of Chicago Press, 13 March, available at Scholar
  19. Ming Wang, J., Yen, and K.K. Lai (2014) ‘China’s financial markets, Chinese shadow banking’, Routledge Advances in Risk Management.Google Scholar
  20. RIETI, Research Institute of Economic, Trade & Industry, IAA (2013) ‘China in transition, shadow banking in China: current situation and challenges’, 6 August.Google Scholar
  21. Schwarcz, S.L. (2013) ‘Shadow banking, financial risk, and regulation in China and other developing countries’, The Global Economic Governance Programme, University of Oxford, GEO Working Paper, No. 2013/83, July.Google Scholar
  22. Sharma, S.D. (2014) ‘Shadow banking, Chinese style’, Economic Affairs, 34(3): 340–52.CrossRefGoogle Scholar
  23. Standard & Poor’s (2013) ‘Will shadow banking destabilize China’s financial system?’, Finance Asia, 10 April.Google Scholar
  24. Standard & Poor’s Ratings Services (2014) ‘The growing pressure for China to shine more light on financial risks’, McGraw Hill Financial, 3 March.Google Scholar
  25. Summers, T., and A. Haskins (2013) ‘Chinese shadow banking: growing fast and raising risk’, Forensic Asia.Google Scholar
  26. The Economist (2014a) ‘A question of trust or not, as the case may be’, Special Report International Banking, 10 May.Google Scholar
  27. The Economist (2014b) China’s debt-to-GDP level 200% and counting’, 16 July.Google Scholar
  28. The Economist (2014c) ‘China’s interest rates: The right call’, 21 November.Google Scholar
  29. Thomson Reuters Accelus (2014) ‘Chinese shadow banking: understanding KRIs and risk scenarios’, January.Google Scholar
  30. VanderKlippe, N., and E. Reguly (2014) ‘China’s looming debt bomb: shadow banking and the threat to growth’, The Globe and Mail, 3 May.Google Scholar
  31. Wiegelmann, A.M., and H.G. Petersen (2013) ‘New institutional economics perspective on credit transformation in China’s financial system’, Faculty of Economics and Social Science, University of Potsdam, May.Google Scholar
  32. Zhang Ming (2013) ‘Shadow banking in China: definition, causes, risks and countermeasures’, International Economic Review, 3, Institute of World Economics and Politics, CASS.Google Scholar

Copyright information

© René W.H. van der Linden 2015

Authors and Affiliations

  • René W. H. van der Linden

There are no affiliations available

Personalised recommendations