Financial Globalization, Shadow Banking and Interest Rate Transmission: Evidence from China
Many long-held views about the global financial system and the effectiveness of monetary policy have been questioned since the Global Financial Crisis (GFC) of 2007/2009. At stake is the capacity of monetary authorities to isolate international monetary policy shocks under financial globalization coupled with the rapid development of shadow banking and its impact on the banking system and monetary policy transmission. This thesis comprises three empirical studies to examine these issues by providing evidence from China. The first study investigates the international transmission of monetary policy from the U.S. to China. The results show that the spillover effects of U.S. monetary policy are significant and strong on China's short-term interest rates after the GFC. The spillover at the long-end of the yield curve even holds before the GFC, but only for positive changes in U.S. long-term interest rates. By comparing the results with countries under flexible exchange rates such as New Zealand, I find a fixed exchange rate regime with capital controls helps to mitigate more effectively external monetary shocks especially during a turmoil period. The second study shifts the focus on the driving forces of the rise of shadow banking in China. Aside from micro arbitrage factors suggested by previous literature, I paid specific attention to a wide range of macro-finance factors. To reflect the unique institutional features that shape macroeconomic policy making in China, I introduce a novel identification strategy to isolate pure monetary policy shocks from the influence of other macroeconomic policy variations. The empirical results show robustly that China’s shadow banking is essentially driven by macro-policy factors including credit scale tightening, strengthened risky-loan regulation, and intensified interest-rate repression. In contrast, the effect of a pure monetary contraction is to reduce shadow banking, due to an economy-wide tightening of liquidity. The third essay investigates how shadow banking impacts loan pricing and the pass-through from policy rates to retail lending rates. The results show that the yield of shadow banking products impacts the lending rates positively, in which 20 percent of the impact takes effect through the deposit channel. The scale of shadow banking wealth management products (WMPs) does not significantly impact lending rates. Furthermore, the rise in shadow banking appears to have decreased the pass-through from benchmark policy rates to lending rates after 2013 by providing alternative credit options to bank loans, supporting the loan-demand side view. On the other hand, I find the effect of shadow banking on the pass-through from market-based short-term policy rates to lending rates became insignificant after 2013 as the arbitrage model shifted from the WMP-channel-shadow credit to interbank-entrustment-securities. However, China’s shadow banking appears to have significantly decreased net interest margins of banks after 2013 as the average return on financial securities invested by shadow banking is lower than on-balance loan yields.
Networked Digital Library of Theses and Dissertations