Working Paper: CEPR ID: DP12864
Authors: Franklin Allen; Yiming Qian; Guoqian Tu; Frank Yu
Abstract: We perform transaction-level analyses of entrusted loans—one of the largest components of shadow banking in China. Entrusted loans involve firms with privileged access to cheap capital channeling funds to less privileged firms, and increase when credit is tight. Nonaffiliated loans have much higher interest rates than both affiliated loans and official bank loans, and largely flow into real estate. The pricing of entrusted loans—especially of nonaffiliated loans—incorporates fundamental and informational risks. Stock market reactions suggest that both affiliated and nonaffiliated loans are fairly compensated investments.
Keywords: shadow banking; entrusted loans; credit shortage; fundamental risk; informational risk
JEL Codes: G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm size (L25) | entrusted loans (G21) |
| economic conditions (E66) | entrusted loans (G21) |
| privileged firms' lending behavior (G21) | smaller firms' access to credit (G21) |
| risk factors (I12) | loan pricing (G19) |
| borrower affiliation (G51) | loan interest rates (E43) |
| loan interest rates (E43) | likelihood of default (G33) |
| loan type (G51) | market perceptions (G14) |