This paper investigates the interaction between non-standard debt investment (NSDI) and non-principal-guaranteed wealth management products (WMPs) of commercial banks in China after controlling the influences of several bank-specific and regulatory determinants. A credit switching model is employed to illustrate the mechanism in which special interest vehicles (SIVs) serve as the conduits for parent banks to conduct regulatory arbitrage by trade-off between on-balance-sheet funding strategy NSDI and off-balance-sheet financing via consignment of WMPs. Using a panel data set of 10 state-owned and joint-stock listed commercial banks over a period of six years (from 2013H2 to 2019H1), our results indicate there exists some statistically significant mutual promotion effects between NSDI and WMPs for Chinese banking and shadow banking system. We also find significant liquidity shock from WMPs to the interbank market. On average, the liquidity need is 4.6% of the WMPs’ total balance. This study provides a new perspective to interpret the mechanism of the causes and consequences of shadow banking in China.
JEL classification numbers: C33 G21 G28
Keywords: Non-standard Debt, Wealth Management Product, Liquidity Shock, Shadow Banking.
ISSN: 1792-6599 (Online)