Chen, Kaiji. <br/><br/>
What We Learn from China's Rising Shadow Banking:  Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending / 
Kaiji Chen, Jue Ren, Tao Zha. 
 - Cambridge, Mass.  National Bureau of Economic Research  2016. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w21890 .
 - Working Paper Series (National Bureau of Economic Research)  no. w21890. .
<br/><br/> January 2016. 
<br/><br/> We argue that China's rising shadow banking was inextricably linked to potential balance-sheet risks in the banking system.  We substantiate this argument with three didactic findings: (1) commercial banks in general were prone to engage in channeling risky entrusted loans; (2) shadow banking through entrusted lending masked small banks' exposure to balance-sheet risks; and (3) two well-intended regulations and institutional asymmetry between large and small banks combined to give small banks an incentive to exploit regulatory arbitrage by bringing off-balance-sheet risks into the balance sheet. We reveal these findings by constructing a comprehensive transaction-based loan dataset, providing robust empirical evidence, and developing a theoretical framework to explain the linkages between monetary policy, shadow banking, and traditional banking (the banking system) in China. 
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