Jun “Qj” Qian

The rise of shadow banking and attendant financial fragility in China can be traced to intensified deposit competition following the 2008–2009 global financial crisis (GFC). A large, state-owned bank’s deposits from cross-border money inflows fell significantly following the GFC, and it supported the government’s fiscal stimulus more aggressively than other large banks by issuing larger volumes of new loans. Small and medium-sized banks with more branch-level overlaps with this large bank relied more on shadow banking and issued more wealth management products (WMPs)—short-maturity, off-balance-sheet substitutes for deposits. Greater amounts of WMPs created rollover risks for the issuers, as reflected by higher yields on new WMPs, higher borrowing rates in the interbank market, and lower stock-market performance during liquidity stress. This paper was accepted by Victoria Ivashina, finance. Funding: This work was supported by the National Natural Science Foundation of China [Grants 71272024, 71972051, and 72071117]. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2023.04233 .

We evaluate the efficiency of capital deployment for acquiring firms before mergers and acquisitions (M&As), defined as the return on invested capital net of the cost of capital, and link this measure to firms’ postacquisition performance. Acquirers with higher preacquisition net returns on investment have superior long-run operating and stock performance than do acquirers with lower returns. Acquirers with low net returns on investment also underperform matching nonacquirers. The relationship between preacquisition investment return and postacquisition performance is weakened when chief executive officer turnover occurs after deal completion. These results imply that managerial ability in deploying capital and creating value for shareholders persists through M&As. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2766 . This paper was accepted by Wei Jiang, finance.

We provide an updated and comprehensive review of China’s financial system and explore the possible challenges in the future. First, China’s financial system has been dominated by a large banking sector, which has played an important role in financing the real economy in the past decades. With the interest rate liberalization, the profitability of banks will go down and the competition in the banking sector will become stronger in the future. Moreover, this sector still needs to meet the challenge to reduce the amount of nonperforming loans. Second, the role of the stock market in allocating resources in the economy has been limited and ineffective. However, with the rapid growth of the markets and the introduction of more financial products, financial markets are expected to play a more important role in the economy going forward. Third, a nonstandard sector that consists of alternative financing channels is the most successful part of the financial system in terms of supporting the growth in the past decades. The co-existence of this sector with banks and markets can continue to support the growth of private and local government firms. Finally, in order to sustain the economic growth in China, policies need to reduce the likelihood of damaging financial crises, including a banking sector crisis, a real estate or stock market crash, and a “twin crisis” in the currency market and banking sector.

This chapter discusses how the financial system can help transform the Chinese economy from a state-led, investment intensive, export-oriented economy into one that relies more on domestic consumption and private sector production. There are five main goals for the next decade: First, more funding is required to support the growth of hybrid sector firms. Second, more financial products and markets are needed to provide a diversified basket of investment products for households and firms. Third, private equity (PE) and venture capital (VC) sectors should be developed to fund innovation and new industries. Fourth, non-bank financial institutions must grow to fund social safety net programmes, and local governments should be able to raise funds through bond markets. Finally, China should try to prevent severe financial crises such as a banking sector and/or market crash and also expand the Renminbi (RMB) as a major international reserve currency so as to balance global capital flows.