Shen Wei, dean and professor of law at Shandong University Law School, KoGuan chair professor of law at Shanghai Jiao Tong University Law School, and global professor of law at the New York University School of Law, has written a significant book on the topic of shadow banking in China. The book covers various aspects of China's shadow banking system, such as wealth management products, internet lending and local government financing channels. Shen is knowledgeable about the significance of shadow banking in China, the relationship of shadow banking with the formal banking system regulation, and risks associated with this sector. His book is important because it summarizes events and reasons for development of shadow banking in China. That being said, some sections are stronger than others.
Shen provides, in chapter two, a nice background on the banking system's relationship to the shadow banking system. Importantly, he points out flaws in the banking system that have led to cooperation between banks and shadow lenders, making note of the troubles incurred when banks interact with the shadow banking sector. This is an important aspect of China's shadow banking evolution, and bank involvement in shadow banking has continued to present a challenge to regulators.
Chapter three provides a general discussion of the financial regulatory architecture, discussing the functions of the People's Bank of China, the China Banking Regulatory Commission, and other high-level regulatory institutions. While the overview is helpful, it would be beneficial also to discuss how these departments have been involved in shadow banking regulation, and to offer up examples in which regulatory bodies appear to conflict. For example, loose monetary policy has spurred the growth of shadow banking, as excess liquidity becomes available via banks to shadowy institutions. This places the central bank at odds, to some extent, with other regulatory bodies which seek to tamp down shadow banking activity. More on the interactions of regulators with each other and the shadow banking sector would aid our understanding of regulators' role in controlling the rise of shadow banking.
Other chapters are successful in summarizing various aspects of the shadow banking system. Chapter four on monetary policy after the global crisis is nicely detailed. Chapters five through seven on wealth management products, local government debt and internet lending describe in detail events and issues associated with these various aspects of shadow lending. However, shadow banking has evolved, or rather mutated, since the time this book was written. For example, the information presented on wealth management products and local government financing channels, while a good summary of past events, is now largely outdated, as new ways of obtaining finance have arisen in order to find loopholes around new regulations. Banks are now trading each other's wealth management products containing existing management products, compounding risks in the financial system. Also, local governments have made use of municipal bonds in order to obtain financing for new ventures rather than replacing existing debt. In China's shadow banking system, this rapid change is inevitable. Therefore, it can be said that Shen provides a relatively complete background on elements in the area of shadow banking with respect to the period before 2015.
Policy-related chapters on interest rate reform in chapter ten, exchange rate reform in chapter 11, financial liberalization in chapter 12, and deposit insurance in chapter 13 also face the issue of being somewhat outdated. For example, in chapter ten, reform is noted as incomplete due to the presence of deposit rate ceilings which were lifted in 2015. In chapter 11, the important inclusion of the RMB in the IMF's SDR basket is not accounted for. A better tie-in to the topic of shadow banking is also necessary so that readers can attach the significance of these financial policies to the theme of the book. Still, many of the observations made in these chapters continue to be relevant, as full interest and exchange rate liberalization (for example) have not yet occurred.
Another issue is that, while the book is well written, this volume tends to rely primarily on newspaper articles for its statistics. A more reliable source of data would have been data generated by China's government or industry organizations rather than secondary sources which are not guaranteed to be accurate. More data in the form of tables and figures from primary sources would help to shore up Shen's arguments, and would add value to his book.
Overall, the book is recommended for individuals looking for a background on China's shadow banking system and financial system regulations and reforms. It may be supplemented by more updated scholarly articles for a fuller picture of today's shadow banking system and reform progress.
