Abstract

Chinese shadow banking has trippled since the crisis, accounting for half of the increase in overall credit to the economy. With tighter US monetary policy, China watchers warn regularly, a Chinese Lehman Brothers is around the corner, threatening the world economy. Yet a modern money hierarchy approach suggests that such concerns are misplaced. Like banks, shadow banks also issue money – promises backed by tradable collateral assets – to fund lending activities. In China, one of every three RMB lent was funded by shadow money by 2016. While US shadow money fragility triggered Lehman’s collapse, China’s shadow money is much more stable for two reasons. Rather than simple regulatory arbitrage, Chinese shadow money is shaped by the Reminbi internationalisation strategy reliant on deepening capital markets. While policy-makers resist calls to allow the adoption of ‘modern’ collateral risk practices, China’s shadow money will not experience the fire sales and runs that brought down Lehman Brothers, triggering the global phase of the 2008 financial crisis.