Market Maker of First Resort–The People’s Bank of China and the Rise of Market-Based Banking

Drawing conceptually upon the literature on critical macro-finance and market-based banking, this article investigates the People’s Bank of China’s (PBC) role in transforming China’s financial system. By analysing regulatory and monetary policy in the context of the party-state’s financial reform agenda and against the background of structural changes in liquidity creation, it shows how the PBC has created a bond market from shadow banking. To this end, the PBC makes and governs through financial markets by targeting the liquidity of interbank collateral through unconventional monetary policies, that is, by expanding its own balance sheet. By developing an interbank bond market, the PBC has restored its control over credit creation and financial stability previously lost to shadow banking, however, at the price of inserting itself more tightly into political economic constraints created by the nexus of liquidity and growth.