Shadow banking, an informal, largely unregulated, financial market, has become increasingly important in China because the fact that it is largely unregulated can threaten the viability of the financial system. Hence, to circumvent regulations, banks have strong incentives to issue WMPs, as WMPs and the assets they invest in are not consolidated on the banks’ balance sheets. 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By placing the stronger balance sheet of the lending non‐financial company in between banks and risky industries such as real estate, financial stability is improved. By Cindy Li and Paul Tierno. Specifically, the Central Bank issued new guidelines tightening rules on asset management in China. Shadow banking in China is a phenomenon so integrated into the financial ecosystem that tackling it will inevitably affect other sectors in the economy, and generate much fear and anxiety among the public. [5] Moreover, the Commercial Bank Law of the PRC bans companies from loaning money to each other, again a documented reason as to why companies within China engage in shadow banking in the form of entrusted loans. Effort to control predatory lending could cause greater harm to SMEs, analysts say. Instead, the funds can be funneled through mechanisms including trust loans, various types of beneficiary rights, and accounts receivables. It is the Wild West of banking in China. However, the People’s Bank of China (PBoC) – China’s central bank – imposed loan quotas on commercial banks in real estate and industries with over-capacity through administrative window guidance, which the PBoC uses to manage the pace of credit provision (Allen et al., 2017). Chinese shadow banking refers to underground financial activity that takes place outside of traditional banking regulations and systems. 2020[1]) has shown that the majority of funds raised through entrusted loans and trusted products have flowed to the real estate and infrastructure industries. The Chinese Banking Regulatory Commission and the Chinese Insurance Regulatory Commission are viewed to have supervisory roles over financial markets within China, rather than having legislative power. This means there are more barriers to accessing lines of credit for Chinese businesses and individuals. China crackdown on shadow banking sector prompts warning . However, the shadow banking (informal lending) industry in China has seen remarkable growth in the first quarter of this year, according to a report by credit rating agency Moody’s. This development, Designing a Prudential Supervisory Framework for Climate Change in the U.S. In our recent paper, we suggest that the implicit guarantees from nonbanks, banks, or government to the shadow banking sector might provide a second-best arrangement in funding risky projects in the real economy and improving welfare, without amplifying systemic risks. China’s shadow banking sector has grown rapidly in the last decade. China’s shadow banking sector has grown rapidly in the last decade. Implicit guarantees from banks, nonbanks, or the government may provide a second-best arrangement in funding risky projects and improving welfare in China. 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