Shadow Banking and the Chinese Economy: Theory and Policy Recommendations

Shadow Banking and the Chinese Economy: Theory and Policy Recommendations presents a compact, evidence based account of China’s shadow banking—born of a major UK–China research collaboration led by Kent Matthews and Zhiguo Xiao. Drawing on firm level analysis, novel provincial measures, an original DSGE model of China’s dual banking system, and regional fiscal studies, the authors trace how shadow finance fills funding gaps, fuels financialization, and shapes macroeconomic dynamics. Key findings: private firms face acute constraints; productivity shocks, not shadow sector instability, largely drive China’s cycles; and nominal GDP targeting often beats micro prudential fixes. The book calls for root cause reforms—tighter SOE budget constraints, price based monetary policy, and regulation that recognizes shadow banking’s functional role—essential reading for scholars and policymakers.