Shadow banking, political connections and financial stability of Chinese banks: an empirical investigation

ABSTRACT

This study examines the effects of shadow banking activities on the financial stability of the Chinese banking system. Moreover, it assesses whether the relation between financial stability and shadow banking activities changes for banks having political connections. The findings suggest a significant positive effect of shadow banking on the credit risk as well as the financial stability of Chinese banks. The growth of shadow banking activities has a significantly positive effect on Chinese commercial banks lowering the default risk and this relationship is incrementally significant for financial institutions having political connections. These findings are robust by controlling for various bank-specific and macroeconomic conditions.

KEYWORDS:

• Shadow banking
• political connections
• financial stability
• China

JEL CLASSIFICATION:

• G21
• G28

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ To see more on political connections and how they add value to firms, see the work of Goldman, Rocholl, and So (2009) and Li et al. (2008)

² Comparable methods and specifications were considered in the study by Hervas-Oliver, Ripoll-Sempere, and Moll (2016).

³ Bashir et al. (2017) ‘Government owned banks lead the Chinese banking market. Big five banks in China control almost 49% of the banking market share in Chinese economy. In case of economics shocks these banks are protected by government bailouts’.