When Shadow Banking Can Be Productive: Financing Small and Medium Enterprises in China

Abstract

Small and medium enterprises (SMEs) represent the backbone of China’s economy, yet they face challenges in accessing bank credit. SMEs thus rely on a wide range of alternative sources, including informal finance, online peer-to-peer (P2P) platforms, registered non-banking financial institutions (NBFIs), and underground financiers. This article distinguishes among different types of ‘shadow banking’ to clarify popular misconceptions about the nature of risks associated with informal financial intermediation in China. Given their familiarity with local business conditions and needs, regulated and well-managed NBFIs could provide an enduring foundation for commercialised financial intermediation serving SMEs.

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