We study how interbank wholesale funding in China influences monetary policy transmission under a dual-track interest-rate system and how it contributes to increasing systemic risks in recent years. By constructing a bank-panel dataset, we find that wholesale funding via interbank certificates of deposit not only facilitates policy interest rates to transmit into loan by non-state banks, but also leads to fast growth in their shadow banking activities as an unintended consequence. Accordingly, non-state banks with a heavier exposure to wholesale funding witness a larger increase in systemic risks in response to negative shocks to the economy since 2018. We advance a theoretical explanation of our empirical findings and quantify the trade-off of banking regulation on wholesale funding between the effectiveness of monetary policy transmission and exposure to systemic risks within this framework.

Professor Kaiji Chen is the Associate Special-Term Professor of Economics at Fanhai International School of Finance, Fudan University and Associate Professor of Economics (with tenure) at Emory University. He is also Research Fellow at Federal Reserve Bank of Atlanta. Professor Chen's current research interests are China's macroeconomics, financial aspects of macroeconomics and fiscal policies. Professor Chen has published in several leading economics journals, including American Economic Review, NBER Macroeconomic Annual, American Economic Journal: Macroeconomics and Journal of Monetary Economics. In recent years, his research focuses on China's macro economy, especially its relationship with the financial sector and monetary policy. His research topics include China's real estate bubble, shadow banking and monetary policy, economic cycle and trends, etc. His research results have been reported by many international financial and economic media including the Wall Street Journal. In 2018, he got the 3rd Sun Yefang Financial Innovation Award. Professor Chen earned his doctor degree in Economics from University of Southern California in 2005.