China’s 2009 economic stimulus program after the global financial crisis led to the growth of shadow banking as local governments scrambled to pay off their obligations under the program.

Regulators loosened borrowing rules to avoid a debt crunch, posing risks to the financial system, but in doing so accelerated China’s financial liberalization.

Asian Development Bank Institute research details the unintended effects of the four-trillion-yuan stimulus plan launched to insulate China’s economic growth from the global financial crisis.

Much of the responsibility for funding the stimulus fell on local governments.

They mostly took on bank loans to pay for the infrastructure projects that formed the bulk of the stimulus plans.

It could take decades for those projects to start paying returns, but the loans came due after about four years on average, leaving local governments searching for ways to service their debts while keeping the stimulus going.

Read the transcript:

http://bit.ly/2FZnwrr

Read the working paper

https://www.adb.org/publications/financing-local-government-prc-stimulus-loan-wanes-shadow-banking-waxes

About the authors

Zhuo Chen is an assistant professor at the PBC School of Finance, Tsinghua University Beijing, People’s Republic of China (PRC).

Zhiguo He is professor of finance at the Booth School of Business, University of Chicago, and NBER, Chicago, US.

Chun Liu is associate professor of finance at the School of Economics and Management, Tsinghua University, Beijing, PRC.

Know more about ADBI’s work on banking in the People’s Republic of China

http://bit.ly/2Fj4XBu