Shadow Funding and Economic Growth: Evidence from China

Using popular liability-side wealth management products in China, we construct an informative measure of shadow funding and shadow credit by extension. This measure reflects the risk appetites of financial intermediaries and their ability to expand their balance sheets through bank-shadow-bank cooperation. Our measure possesses unique predictive power for future economic activity. An increase in the measure corresponds to increases in investment and consumption, which, in turn, reduce financing costs due to improvements in economic development.