Some observers believe that the recent rapid expansion of China’s shadow banking sector threatens financial and price stability.
After close examination of the issue we have reached a very different conclusion.
- China’s financial authorities have tolerated the rapid expansion of shadow banking activities because they hope to learn lessons about how to implement future financial sector reforms.
- The authorities will sooner or later crack down on activities they find undesirable such as off-balance sheet lending and securitized finance, while tolerating “good shadow banking” such as wealth management products.
- On balance, wealth management products help to underpin the stability of the Chinese banking system by improving the efficiency of capital allocation in the domestic economy and promoting de facto interest rate liberalization. (China 19 September 2011)
As of 2017 there have been no major blow ups in wealth management products.