Shadow Banking Modes: The Chinese versus US System*

In this paper we provide a theoretical analysis of the rapid growth of Chinese shadow banking since 2008 and compare it to the rise of the US system in the 1980s. We show that the two systems are based on different mechanisms (implicit guarantees in China versus financial engineering in the US) and operate on different platforms (banks versus capital markets). Our model highlights why Chinese shadow banking is bank-centric and driven by asymmetric perception of implicit guarantees. In addition, we discuss the role of the Chinese government and welfare implications and formalize the conceptual differences between implicit guarantees and securitization as well as asymmetric perception of implicit guarantees and neglected risks.