１
２【特集・論文】

The Political Economy of State Capitalism
and Shadow Banking in China＊
Kellee S. Tsai

［キーワード］China, State capitalism, informal finance, shadow banking,financial development［JEL 分類番号］O17, N25, G23

1. Introduction

ment financing vehicles have flourished in the
last

five

years.

What

distinguishes

this

The particular expression of state capitalism

pluralization of financial products from financial

and shadow banking in contemporary China

marketization in other contexts is that it did

rests on intersecting political and economic

not result from de‑regulation or liberalization

logics with mixed developmental implications.

of interest rates. Instead, this paper suggests

On the one hand, the fortification of statethat continued financial repression, combined

capitalism during the 2000s reinforced systemicwith monetary expansion and new technologies

tendencies towards capital‑intensive growth.

of finance, has fueled shadow banking within

On the other hand, the fiscal stimulus of 2008

the broader context of state capitalism. The

incentivized new expressions of state sector

case of reform‑era China shows that financial

involvement in off‑balance sheet financing.

development is neither a pre‑requisite nor an

The counterintuitive juxtaposition of these

automatic result of economic growth.

trends presents an opportunity to revisit

divergence from conventional expectations isconventional theories of financial development.

largely due to the effects of competing

One of the features of state capitalism isdomestic political priorities, coupled with thestate‑directed allocation of credit, and indeed,
China has maintained a financially repressed
environment that has enhanced the profit
margins of state‑owned enterprises (SOEs).

This

rapid diffusion of new technology.

2. State Capitalism, Informal Finance,
and Shadow Banking

But ironically, the monetary expansion of theState capitalism in contemporary China haslate 2000s, coupled with new technologies ofa dualistic structure. On the one hand, throughfinance, have led to a remarkably liberalized

SASAC the state maintains direct ownership

financial environment, in which both state andnon‑state actors are involved in shadowbanking.

Novel forms of Internet financing,

wealth management funds, and local govern-───────────＊ This is an abstract of an article that willappear in Issues & Studies, Vol. 51, No. 1(March 2015).

The Political Economy of State Capitalism and Shadow Banking in China

of assets in strategic sectors of the economy(e.g.,

defense,energy,１３

3. From Informal Financeto Shadow Banking

telecommunications,finance); and engages in industrial policy topromote priority sectors (e.g., high‑end equip-

One of the defining features of state

ment manufacturing, automobiles, bio‑tech,capitalism in China is the system s structural

alternative energy).

The party‑state also

bias towards allocation of capital towards

retains nomenklatura control over personnel

state, collective, and joint stock enterprises.

appointments for top leadership and managerial

Although over 99 percent of registered firms

positions in state firms.

On the other hand,are small and medium enterprises, SOEs

much of China s economy operates on market

receive over 85 percent of loans extended byprinciples.

Downstream consumer‑oriented

state‑owned commercial banks, and accountlight manufacturing and export industries arefor over 60 percent of publicly listed businesses

open to competition and dominated by private

on China s stock markets.

SMEs and foreign‑invested enterprises.

Indomestic private sector has faced challenges inshort, China has a mixed economy that is bothsecuring commercial bank loans, and raisingstate‑dominated and market‑oriented.

funds from domestic equity markets.

As a result, theAlthough the preponderance of registered

Since the earliest years of reform, private

businesses in China are private SMEs that fallbusinesses have relied on a variety of informal

within the market portion of this dualistic

financing mechanisms, including those withstructure, the term state capitalism is typicallyhigh rates of interest. A survey of private

used to denote the state s dominant role in key

entrepreneurs during the mid‑1990s foundindustries.

that nearly two‑thirds had used some form of

A popular factoid is that the

preponderance of Chinese companies on theinformalfinance.

More

recentresearch

Forbes 500 list of the world s largest companies

indicates that reliance on unofficial financing

are SOEs. Meanwhile, since their IPOs in themechanisms has not abated. Indeed, the scopemid‑ to late‑2000s, China s

big four banks

of informal finance has expanded into thehave ranked among the largest in the world in

broader universe of shadow banking, whichterms of market capitalization.

involves not just private entrepreneurs, but

In 2013, theIndustrial and Commercial Bank of China

middle‑classranked first, followed by the China Construction

management products and local governments

professionals

seeking

wealthBank (#2), Agricultural Bank of China (#6), andfacing unfunded mandates and incentives toBank of China (#9). The nexus between thedemonstrate economic development. Arguably,

state industry and state capital is further

the contemporary map of informal finance andunderscored by the finance companies operated

shadow banking represents a parallel politicalby large business groups (jituan gongsi ). The

economy that complements, and therefore, islargest ones include China Petroleum Finance,

just as functionally entrenched as the vested

China Power Finance, Sinopec Finance, China

interests in the state sector.

Shipbuilding Finance, SAIC Finance, China
Aerospace Finance, and CNOOC Finance.

A key reason for this functional entrenchment
is because most forms of informal finance andshadow banking are not technically illegal.
Within China s context, informal finance refers

１４

中国経済研究第１２巻第１号

to a range of financing, savings, and investment

spectrum are a host of non‑banking financial

vehicles that are not sanctioned by the People sinstitutions that may be registered with the

Bank of China (PBC). This definition leaves

Industrial

room for the reality that various types of

Bureau or other official entities. These include

informal financing arrangements and non‑pawnshops, trust and investment companies,banking financial institutions are either regis-

leasing companies, credit guarantee companies,

tered with other official entities?or quietly

microfinance companies, rural credit unions,condonedand financing arms of registered companies.

becausethey

providefinancialservices to underserved local markets.
other words,

andCommercial

Management

In

Underground money houses may or may not

not sanctioned by the central

be conducted through commercial operations

bank does not mean that they are explicitly

registered in the guise of a legitimate non‑banned. The latter typically occurs only whenfinancial business; but either way, they are nota particular type of financing mechanism

legal.

triggers a local financial crisis.

Categorizing

In addition to reinforcing the types ofthe expressions of informal finance according

informal finance used by private entrepreneurs

to their relative degree of institutionalizationand investors, China s massive 2008 stimulus

provides a proxy for their relative visibility toplan fueled the rapid expansion of shadow

officials.

banking among government entities. The

At the least institutionalized end of the

Financial Stability Board (2013) defines the

spectrum of informal finance, interest‑free,shadow banking system more broadly as theuncollateralized loans among friends, families,

system of credit intermediation that involves

and business associates are commonplace andentities and activities fully or partially outside

do not attract official attention.

the regular banking system, or non‑bank

Similarly,

extending trade credit (supplying merchandise

credit intermediation in short.

prior to payment) is a standard operating

case, shadow banking includes the types ofpractice among private vendors. Borrowing

informal finance discussed above, but has comefrom individual money lenders and money

to be associated more closely with local

brokers (called qian zhuang, yinbei, or dui denggovernment debt and wealth managementzhe ) sometimes with high rates of interest andproducts in the last several years.

use of collateral, is also common among2008 and 2010, the central government s

business owners.

original 4 trillion RMB ($586 billion) package

In China s

BetweenSome forms of informal finance come withultimately raised 12 trillion RMB in funds,

written terms and greater organizational

primarily through shadow bank lending to local

complexity, as with various types of rotating

governments.

credit and savings associations (ROSCAs or

vehicles (LGFVs) became the primary channelhui ), which are primarily found in southeasternthroughprovinces. Other types of unregistered, quasi‑

financed public goods and large‑scale infrast-

institutionalized

Local government financing

which

sub‑national

governments

includeructure projects. They also (over)invested innongovernmental investment alliances andother types of capital‑intensive industries such

reciprocal loan‑guarantee networks.

as real estate, mining, shipbuilding, solar

informalfinance

Within the more institutionalized end of theenergy, and steel. By 2011, it was clear that

The Political Economy of State Capitalism and Shadow Banking in China

１５

the stimulus had contributed to excess capacity

insurance to Internet sellers and buyers

in these industries, which meant that manyon potentially disputed transactions.

local governments faced cash‑flow challenges

6) Online securities platforms:

in meeting debt service obligations andclients to trade stocks and bonds online.

Enablerepaying short‑term loans. A national audit
revealed local government debt had reached17.9 trillion yuan ($2.9 trillion) by mid‑2013.

Due to its unregulated character, Internet
finance is also regarded as part of shadow

Besides contributing to expansion in local

banking in China. Since the late 2000s, one ofgovernment debt, the stimulus incentivized

the fastest growing segments of Internet

banks, SOEs, and state‑affiliated entities withfinance is online lending in the form of peer‑to‑ready access to bank credit to provide loan

peer (P2P) networks that bypass the banking

guarantees for private borrowers. They alsosystem.

extended loans to real estate developers andlending, P2P platforms match lenders andprivate businesses through trust companies.

borrowers who are typically unknown to one

In turn, trusts connected to state banks issued

another, and perform credit checks on thewealth management products (WMPs) toborrowers in a more streamlined manner thaninvestors seeking higher returns than the 3.3

banks. By August 2014, there were 1,350 P2P

percent deposit rates in regular savingssites in China with an annual transaction

accounts. As of May 2014, the China Banking

volume of over 100 billion yuan.

Also called

person‑to‑person

Regulatory Commission (CBRC) reported that

Despite continuing private sector demandbanks held 13.97 trillion yuan ($2.2 trillion) infor loans from trust companies and higher

outstanding WMPs through trust companies.

returns from WMPs and P2P platforms,

Finally, the stimulus coincided with theshadow banking carries risk to the entire

spread of Internet access and social media in

network of participants. The subprime crisis

China.

By 2014, over 60% of China s online

in the United States provided a particularly

population had used internet financing products.

vivid demonstration of how initial losses

The main types of Internet and mobile financeassociated with a novel, under‑regulated

include the following:product─mortgage‑backed securities─could

1) Third‑party payment services: Enablecatalyze devastating effects reverberating into

online consumers to make payments to

the global economy. Indeed, a similar logic hasmerchants.

already triggered a number of local shadow

2) Crowdfunding:

Mobilize online contri-banking crises within China, as shown in threebutions to support charitable causes andexamples that are presented in the full‑lengthcommercial start‑ups.

paper.

The first demonstrates the risks

3) Peer‑to‑peer (P2P) platforms: Broker

associated with networks of reciprocal loan

online loans between businesses seeking

guarantees;

funding and ordinary lenders and investors.

management products offered by trusts; and

4) Online wealth management products

the third case concerns the recent proliferation(WMPs):of P2P lending portals.

Offer investment products toclients of state banks and trust companies.
5) Online

insuranceservices:

Offer

the

seconddiscusses

wealthThere are other examples of shadowbanking that carry risk to the formal financial

１６

中国経済研究第１２巻第１号

system and the participants who have turned

represent an unusual degree of coordination on

to informal finance. These risks derive fromthe part of PBC and CBRC.

the structural constraints of state capitalism

establishment of the CBRC in 2003, the two

and financial repression. Private entrepreneurs

ministerial‑level bureaucracies have co‑existed

have engaged in financial arbitrage between

in tension, if not mutual distrust. The PBC sstate‑mandated ceilings on interest rates on

official mandate is monetary policy, while thethe one hand, and market demand for SME

CBRC is charged with bank supervision.

financing and higher returns on savings, on thepractice, however, the PBC and CBRC haveother. If China s commercial banks were notoverlapping areas of jurisdiction and maystate‑dominated and extended loans on the

support divergent approaches in dealing withbasis of market potential, then interest rates

informal finance and new technologies, such as

on both savings and lending rates would

P2P lending and on‑line banking.

approach the curb market rates of 15 to 20

bureaucratic politics provides only a partial

percent on deposits, and an additional margin

explanation for why shadow banking hasof five to ten percent on short‑term loans.

flourished in a regulatory void.

Instead, shadow banking has flourished, andsection examines the political and institutional

expanded significantly in volume since thenuances of reforming shadow banking within2008 fiscal stimulus.

the broader context of state capitalism.

In 2012, estimates on the scale of shadowbanking in China ranges from an estimated 26
to 69 percent of the country s GDP, and nearlyEver since the

In

But

The next

4. The Political and Institutional Nuancesof Reform

half of shadow banking activity involves off‑

A core challenge to deepening market

balance sheet activities of official state banks.

reform is the fact that both SOEs and state

The rapidity of its expansion since 2010 (whenbanks are vested in financial repression. The

banks reduced lending) and on‑going cases ofmaintenance of a wide spread between thefinancial failure in the sector has raised

ceiling on savings deposit rates and a floor on

concerns about inadequate/absent supervision.

bank lending rates has enabled banks to

As such, in early 2014, the State Council issued

generate substantial profits.

Document No. 107 to outline a framework for

token, SOEs and other large businesses haveensuring that each of the specific forms ofbenefited from subsidized credit. The private

shadow banking is subject to regulation by asector s reliance on informal finance and thespecific agency or institution.

expansion of shadow banking involving partici-

Then in May 2014 the PBC, CBRC, and three

By the same

pation by state entities is a direct result ofother financial authorities jointly issued afinancial repression.

Notice on Regulating Interbank Business ofestate boom can also be traced to financial

Financial Institutions ( Notice No. 127 ), which

repression, given the combination of subsidized

outlines an initial framework for regulating

credit and savers seeking higher returns.

interbank lending.

Much of China s real

The CBRC concurrently

The segments of China s political economy

issued a supporting Notice No. 140 onthat stand the most the lose with interest rate

Regulating

Interbankliberalization and opening of previously restri-Business of Commercial Banks. These notices

cted sectors to private investment would betheGovernanceofThe Political Economy of State Capitalism and Shadow Banking in China

１７

the middle class beneficiaries of state capita-

their participation in off‑balance sheet activities.

lism.

Pillar industries (such as finance,

Yet the resulting vibrancy of the shadow

petroleum, energy, steel, petrochemicals) havebanking markets did not result from financial

thrived under a host of financial, fiscal, andderegulation.

production benefits. Increases in the cost of

Instead, the government s Keynesian effort tocredit, the amount of taxes remitted to the

avoid recession inadvertently incentivized thecenter, and price of inputs would diminish

very agents of state capitalism to partake inprofit margins under current operating condi-

shadow banking. The concomitant spread oftions.

Internet and social media fueled an equally

State banks and SOEs in selectFinancial repression remains.

industries would be exposed to greater

unexpected liberalization in the technologies

competition by private entrepreneurs andof and participants in informal finance. Middle

investors.

In addition, the rate of non‑class savers are investing in wealth manage-

performing loans in state banks, while low

ment products through mobile devices, andcompared to the late 1990s, would continue tothose same products are being invested in arise and require writing off bad assets.

variety of private business ventures promising

The other major group of vested interests

high returns.

State capitalism and shadow

are local governments who developed reliancebanking have now intersected and developedon LGFVs over the last five years.

areas of mutual dependence, or more accura-

LGFVs

provided a means for local governments totely, mutual liability.

match central stimulus funds by investing in

The risks associated with such mutual

local real estate and infrastructure projects,

liability are not trivial. The increased engage-and financing various public goods. This fiscal

ment of public sector actors in shadow banking

dimension of shadow banking will be challen-

practices means that crises in informal financeging to dismantle as LGFVs need to be

are less likely to be contained to a particularsystematically regulated (if not dismantled).

locality or network of private business owners

But

rectification

because both banking and non‑banking finan-targeting various forms of informal finance has

cial institutions are engaged in off balanceoccurred on a reactive, as‑needed basis during

sheet transactions that are supposedly collater-

the reform era.

alized by state assets and real estate.

campaign‑stylefinancial

Meanwhile, the Ministry of

Finance is planning to develop a regulated

During the March 2014 NPC, the Premierframework for local borrowing, starting withannounced various reform measures, which if

experimental municipal bond markets.

implemented, would erode the edges of state

5. Conclusion

capitalism and reduce some of the risks
associated with shadow banking.

These

This paper proposes that China s response toinclude deepening SOE reform, increasing

global financial crisis disrupted the preceding

market access in the services sector, establi-equilibrium of financial dualism under stateshing private small‑ and medium sized banks,

capitalism. Unprecedented expansion of bankand setting up channels for the issuance oflending after 2008 created opportunities for adebt by local governments.

host of state economic actors─including SOEs,

Xi Jinping s strategy towards governancestate banks, and local governments─to expand

has been decidedly centralizing, disciplinary,１８

中国経済研究and repressive thus far.

He has appointed

第１２巻第１号

networks communicate, define, and re‑shapehimself to three major new committees

the message instantaneously.

overseeing national security, restructuring andwarned earlier,the internet.

China, but fighting corruption will destroy thecorruption

Meanwhile, the vigorous anti‑
campaign

hasreachedsenior

As Chen Yun

Corruption will destroy

Party.

leadership in the petroleum industry (Jiang
Jiemin and Zhou Yongkang); and internet andReference

media controls, including expulsion of foreign

Financial Stability Board, Global Shadow
Banking Monitoring Report 2013, November 14, 2013, available at:http://www. finan
cialstabilityboard.org/publications/r̲1311
14.pdf.

journalists, has intensified.

In this cyber‑

networked milieu, such threats heighten speculation about the leadership s underlying politicalmotives.

The casualties of contemporary

campaigns can no longer be re‑packaged in a(Johns Hopkins University

bubble with a time lag, as they were during theand Hong Kong University

Mao era. Despite censorship efforts, electronicof Science & Technology)

The Political Economy of State Capitalism and Shadow Banking in China

１９

The Political Economy of State Capitalism
and Shadow Banking in China
Kellee S. Tsai (Johns Hopkins University
and Hong Kong University of Science & Technology)
Keywords: China, state capitalism, informal finance, shadow banking,financial development
JEL Classification Numbers: O17, N25, G23
The Xi‑Li administration faces the dual challenge of managing state capitalism and shadowbanking as China enters a phase of more moderate economic growth. During China s first three
decades of reform, private sector development occurred in parallel with prioritization of state‑owned enterprises in strategic industries, and growth surged. This pattern of state capitalism
rested on an unarticulated bifurcated financing arrangement whereby the formal banking system
primarily served public enterprises, while private businesses relied primarily on informal finance.
However, China s response to global financial crisis disrupted the preceding equilibrium of financial
dualism under state capitalism.

Unprecedented expansion of bank lending after 2008 created

opportunities for a host of state economic actors─including SOEs, state banks, and local
governments─to expand their participation in off‑balance sheet activities.

Yet the resulting

vibrancy of the shadow banking markets did not result from financial deregulation. Financial
repression remains. Instead, the government s Keynesian effort to avoid recession inadvertently
incentivized the very agents of state capitalism to partake in shadow banking. The concomitant
spread of Internet and social media fueled an equally unexpected

liberalization in thetechnologies of and participants in informal finance. Middle class savers are investing in wealthmanagement products through mobile devices, and those same products are being invested in avariety of private ventures promising high returns. State capitalism and shadow banking have now
intersected and developed areas of mutual dependence, or more accurately, mutual liability. China spresent leadership has thus signaled intentions to curb the scope of state capitalism and shadowbanking, including official corruption associated with both. These efforts, however, face a variety ofpolitical and institutional challenges.