The Rise of Shadow Banking in China: The Political Economy of Modern Chinese State Capitalism

China’s response to the global financial crisis created an unprecedented expansion of bank lending after 2008, spurring a host of state-sponsored economic actors— including SOEs, state banks, and local governments—to expand their off-balance sheet activities. Off-balance sheet activities and shadow banking are estimated to account for 26-69% of China’s entire GDP (see figure on page 2 for details). To reduce some of the risks associated with shadow banking, China must implement deeper SOE reforms, increase market access in the services sector, establish small- and medium-sized banks, and set up channels for debt issuance by local governments.