Impact of the Shadow Banking System on Monetary Policy in China

The shadow banking system in China has its own characteristics compared to conventional commercial banks and foreign shadow banking system. Its emergence is important to the economic development and financial system in China. However, it also challenges the implementation of monetary policy and regulation. China is in the economic shunt period and their monetary policy system is somewhat lagging behind the advanced economic system. This paper is therefore designed to figure out impacts of the shadow banking system on monetary policy. After analysis of SVAR model, results show that an increase in the growth rate of the shadow banking system would affect the monetary policy by increasing money supply and the value of CPI. Moreover, the implementation of easy or tight monetary policy by increasing or decreasing the benchmark interest rate would not be able to achieve the original goals due to the activities of the shadow banking system. It is suggested that Chinese authorities should follow the market requirement to improve the monetary policy system by means of supervision and regulation on the shadow banking system which would improve the monetary policy effect.