Research on China's Financial System towards Sustainable Growth: The Role of Innovation, Diversity and Financial Regulation

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China withstood the Global Financial Crisis. Hence, at a first glance - if history is a good guide for China's resilience in future - one should not be too concerned about financial stability. Of course, house price inflation might be a source of instability. However, lending criteria seem to be robust with minimum down payments of 20% for first time buyers and 30% for second homes since February 2016. Recent data published by the People's Bank of China (PBoC) show that bank loans grew by 14.07% year-on-year to the end of April 2016, and total credit in the economy expanded by 13.13%. Interestingly, loans seem to grow faster than credit - a particularly curious irregularity that has afflicted the Chinese economy since 2014. As of April 2016, shadow banking accounts for 15.19% of total credit (approximately 50% of GDP). The expansion of shadow banking seems to be a response to disparities in access to finance with large parts of the economy, notably small and medium sized enterprises (SMEs), facing financial constraints. Moreover, recent technological advances and improvements in infrastructure (e.g. high-speed internet access) have helped to make financial innovations available to an increasing number of end-users. Financial technology (fintech) such as crowd-funding and peer-to-peer lending platforms have emerged in China, offering new ways to access financial services. In spite of the considerable potential of newly emerging fintech businesses in China, recent issues, e.g. the collapse of the peer-to-peer lender Ezubao, highlight the need for better regulation of the industry. Our project aims to answer the overarching research question: how can the Chinese financial system contribute to sustainable economic development? This is further divided into two sub questions: (1) how can financial sector reforms improve financial inclusion, contributing to sustainable growth and development, and (2) how to safeguard financial stability in China? Our proposal will focus on sustainable economic growth, which considers trade-offs between economic, social and environmental targets. Economic growth is only sustainable if growth is inclusive and environmental risks are considered. The project is organised in six work packages (WPs). WP1 will provide an overview and a meta-analysis based on prior research on financial inclusion and risk in China. WP1 will consider fintech businesses in China and their role in promoting inclusive finance as well as their alleged contribution to financial risk. WP2 will model the link between financial development, financial innovations and sustainable growth. Potentially, the most significant contribution of our project is the construction of novel indexes for diversity and resilience in China, which assess three key financial markets: deposits, mortgages and business loans from 2000-2016. WP4 will use these indexes to examine the impact of diversity on financial inclusion and stability. WP5 will explore China's Enterprise Bankruptcy Law and its impact on inclusive finance. Apart from this specific policy change, WP5 will develop advanced quantitative methods to evaluate the impact of policy changes, taking into account causal order. WP6 will assess the extent of compliance in the Chinese financial industry regarding the promotion of green finance. Environmental risk is seen as a material risk to the financial sector, and the financial sector is also the place where the allocation of capital into sustainable or non-sustainable investments is decided. Ma Jun, the PBoC's Chief Economist, has set up large working groups within the central bank, and the Green Finance Committee was set up by the PBoC to develop green finance practices including environmental disclosure, environmental stress testing for the banking sector, and guidelines on greening China's overseas investment. We will assess whether these recent policy changes have triggered a change in lending practices