Book Review: Shadow Banking and the Rise of Capitalism in China

Review of Shadow Banking and the Rise of Capitalism in China, by Andrew Collier (Palgrave Macmillan, 2017), published by China Journal 80, no. 1 (2018).

June 15, 2018

Shadow banking is one of the most consequential and least understood areas of China’s economy. Shadow Banking and the Rise of Capitalism in China takes on and largely succeeds in illuminating shadow banking and its role shaping and being shaped by the twisted nature of relations between the state and private firms in China.

One thorny question on which there is no global consensus is key to the book’s discussion: “what is shadow banking?” Andrew Collier calls it “a catchall label for nonbank lending” and he refers to others’ work to specify that Chinese shadow banking is “money collection not authorized by anyone”, as opposed to operators approved or cleared by the central bank or a local government (2-3). I found this definition confusing despite years of experience researching China’s financial system, so most readers are likely to finish the book without a clear idea of Collier’s conceptualization of the most important concept in the book. It would have been helpful if he explained what terms like “money collection” and “authorized” mean in this context, as well as what they imply for our understanding of shadow banks.

Collier argues that shadow banks emerged naturally as Deng-era reforms created demand for capital outside of the state plan and gradually gave financial firms more flexibility to allocate capital. Shadow banking’s explosive ascendance arose after the credit-fueled stimulus ordered by the Chinese government in the wake of the global financial crisis of 2007-9. Officials tacitly allowed and encouraged an expansion in shadow banks to ensure that credit would continue to flow, even after regulators began to restrain bank lending activity. Private firms, state-owned enterprises, banks, and local governments used trusts and local government financing vehicles (LGFVs) to circumvent controls and create “one of the greatest increases in credit the world has ever seen” (7). The result has been chaotic, sustaining growth but also resulting in countless wasteful projects with convoluted ownership and bad debts.

One of the book’s strengths is its understanding that shadow banking is not just a financial phenomenon. Contradicting Chinese government goals have shaped it, especially given that Beijing’s desire for control creates a tension with the growth of private firms and local imperatives to gain autonomy and fuel economic expansion. Through a series of examples drawn from other scholars and his own experience in China, Collier dispels the notion that China’s financial bureaucrats are the far-seeing sages they are often purported to be: “there is a combination of confusion, regulatory reluctance, and bureaucratic impediments to adequately regulating new forms of financial intermediation” (124). This is especially true in the area of Internet finance, where the book depicts a deep dive into risky practices by major market participants. Another strength is the book’s ability to put conceptual discussions and statistics in context and make them memorable by connecting them to Collier’s own experience in China. In key portions where data is spotty and product definitions are murky, anecdotes from players such as wealth management salespeople with little clue as to what they are selling provide real insights.

The book concludes with a discussion of the risks and future of shadow banking. Readers may be alarmed at the stark contrast between the sophisticated veneer of modern risk management tools at China’s financial institutions and a banker’s defeated admission to Collier that “We will give [state-owned enterprise borrowers] anything they want. They’re backed by the government” (p.91). Collier believes that factors such as the pervasive hand of the state throughout the financial system will not lead China into a financial crisis along the lines of what the U.S. faced in 2007-8. Instead, he suggests that eventual shortages of capital to sustain China’s debts may force China’s leaders to be more judicious with resources, funneling capital to companies and localities with influence in Beijing, exacerbating inequality between regions, but also opening up space for more productive private firms to thrive and creating even more need for shadow banks to step in where the state cannot manage alone.

One shortcoming of the book is that analyses of a given issue from multiple sources are often presented with only cursory critical evaluation of their arguments. While there is a great deal of useful information, the book’s organization is not always tight. It gets bogged down in places, for example by going into detail about which institution did the data crunching on a study. The final chapter introduces a lot of new content, which crowds out space that would have been better used on the rich conclusions a reader could draw from the earlier analyses.

In some places, the book could have benefited from more attention from a discerning content editor. Discontinuities and factual errors distract from useful content when Collier strays outside discussions of Chinese economic reform or shadow banking. For example, Chapter Four begins with the incorrect statement that “Chongqing is the capital of Sichuan Province” (the capital is Chengdu), and Timothy Geithner is listed in Chapter Ten as the U.S. Federal Reserve Chair (he was Secretary of the Treasury). The writing is also choppy in places, such as when Michael Pettis is called “China’s most trenchant analyst of China” (149). Citations are also inconsistent throughout the book and can be bemusing, such as when a long URL appears in the main text.

Overall, though, this is an insightful, accessible work rich in resources to understand China’s political economy and financial system. Its plain language, colloquial tone, and colorful anecdotes help keep readers engaged in what could have easily been a much drier, academic tome.