China Shadow Banking: The Development of Interbank Activity and Relationship with Bank’s Credit Rating

The first half of the paper analyzes the difference of shadow banking(SB) between China and US. The market size, development, related products, activities and law of China’s SB are introduced as well. Generally, China’s SB is classified into two parts, SB “inside” and “outside” of the system. The former is the main part of China’s SB and is the most different part comparing to US. Therefore, SB “inside” is discussed through the whole paper. Besides, not only the definition of “interbank asset” said by China government, but also “financial asset available-for-sale” and “investment securities— receivables” in our analysis, which are not yet regulated but generally viewed as a new SB activity have been considered for more integrity on the research. The last half of the paper investigates how the SB activity affects the bank’s credit rating using Chinese and US commercial banking data. Interbank loan ratio is used as a proxy variable for SB activity. The evidence shows that the interbank loan ratio is a significant explanatory to credit rating in China. Besides, the effect of interbank loan ratio on credit rating between China and US are significantly different. On average, in China, the more interbank loan bank do, the worse bank’s rating is. However, in US, the more interbank loan bank do, the better bank’s rating is.