The real effect of shadow banking regulation: Evidence from China

I find a crackdown on shadow banking has real effects. For identification, I exploit a policy — the “New Regulations on Asset Management” (NRAM) — that restricts the issuance of wealth management products (WMP) in China. I show firms with high WMP exposure experience a decline in investments. The effects are pronounced for firms that are more profitable, have higher revenue growth, and are more financially constrained. Exploration of the possible channels of these effects shows a decline in the credit supply of banks that relied more on WMPs, driven by the fall in their shadow banking activities.