Abstract:
China's growing shadow banking system allows private firms to be able to have more access in the financial market. It has been difficult to for them to get loans from state banks. However, the shadow banking institutions (SBIs) are featured with two inefficiencies. First, they are relatively small and are not able to diversify risks well. Second, the government is expected to provide guarantees for SBIs and the firms who get the loans from SBIs when they are not able to pay back the loans. This keeps inefficient firms and sunset industries still alive. In this project we would also like to potential reforms to improve the efficiency of firms and shadow banking institutions, and potential obstacles.