Why did Chinese shadow banking surge after 2009?

Chinese shadow banking has become a well-noted subject in the discussion on Chinese financial system. Joe Zhang, a former research analyst and investment banker at UBS, recently published a book Inside China’s Shadow Banking: The Next Subprime Crisis which fueled the already heated discussion on Chinese shadow banking.  Similar to other analysis, Joe attributes the origin of China’s shadow banking to financial repression, which includes the artificially low interest rate in China. 

I agree. Low deposit rate makes depositors, including households, corporates and goverment seek higher return. Low lending rate as well as other pro-investment institutions boosted endless credit demand. To avoid inflation and credit bubbles, the banking regulators set loan quota every year for the banking system (but it failed several times in controlling inflation and it never succeeded in curbing property prices). Since 2010, property developers were specially restricted to get access to bank loans as a measure to curb the property market. However, the property prices only dipped for a short while. Loan quota and specific restriction on property loans makes some borrowers, especially property developers, seek financing from non-bank channel. Consequently, from both the borrowers’ and the depositors’ sides, there is tremendous need for a “banking system” that is not as strictly regulated as the formal banks. Therefore, not only the non-bank financial institutions started to fill in the gap (trust company products, security company products, etc), but the formal banks tried to faciliate those demands in a way that regulators can hardly control (bank wealth management products).

However, there is a key question that Zhang and many other analysts did not answer. Why did Chinese shadow banking surge only after the global financial crisis? Negative real interest rates and lending quota have existed in China for many years before 2009, but the “shadow banking” people referred to during that time was largely lendings of pawn houses or lendings between individuals. Large financial institutions were not involved that much. It was only after 2009 that the trust companies and banks’ wealth management products surged. Why did that happen? What is different after 2009 from the previous years?

The deregulation tendency among policymakers?

credit boom in 2009 enlarged the demand of further credit, but the inflation in 2010 make CBRC control lending more strictly so they went to seek other channels for credit.