Interest rates and shadow banking in China

CHINA ADVISORY - Report 14 May 2021 by Andrew Collier

China is attempting to reduce risk in the financial system. This includes controlling monetary policy and interest rates. However, the substantial participation of shadow banking in total capital flows – ranging from heavily regulated to lightly regulated forms – means that Beijing has a limited ability to control the direction of interest rates and monetary policy in general. This fact is usually ignored both by central government official statements and external analysts. This has important consequences for imported inflation under the current U.S. stimulus.

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