Effective shadow banking regulation in China : towards the construction of an optimal regulatory structure

Abstract

This thesis studies shadow banking regulations in China from a legal perspective. The overall objective of this research is to explore an optimal financial regulatory structure relying on legal mechanism that best suits the regulation of shadow banking system in China. In order to achieve this goal, this thesis firstly examines existing Chinese shadow banking activities, and upon which offers the definitions of the Chinese shadow banking system that can be optimally utilized by the legislature and courts. In addition, given the traditions and cultures in China, this thesis explores the rationales of current financial regulation approaches to the Chinese shadow banking sector. In the process of achieving the research objectives of this thesis, the applicability of the Legal Theory of Finance (LTF) to Chinese shadow banking is examined. The LTF, which is based on the studies of the U.S. financial structure, suggests that it is impossible for the law to be strictly applied to the financial sector in times of stress without destroying its financial system. This creates the law and finance paradox. Based on this theory, legal regulation of the shadow banking system in China might not be a viable solution if such regulatory approach is a state dominated one since China demonstrates a stronger tendency of soft survival constraint than the U.S. and that the LTF possibly has more interpretative power in China than many other regions with more advanced/mature financial markets. As a result, it is possibly a better approach if the Chinese financial regulatory structure can be modified so as to rely more on private law than public law mechanisms. Ever since the concept of “shadow banking” is introduced, shadow banking activities have been biased to be something that is harmful, and the attitudes adopted by the regulators towards shadow banking are often capricious and unpredictable. However, as existing research and this thesis will argue, in terms of expanding credit access, increasing market liquidity, maturity transformation, and diversifying risks, shadow banking serves to be a good complement to the traditional commercial banks.