The real effect of pilot free trade zones: Evidence from shadow banking activities

Abstract

China established the Pilot Free Trade Zones (PFTZs) with the aim of promoting the real economy. Existing research has insufficiently explored the real effect of PFTZ policy on implicit financial assets, namely shadow banking activities. Using a multi-period Difference-in-Differences (DID) approach, we investigate whether and how the implementation of PFTZ policy affects the shadow banking activities of non-financial firms from 2008 to 2022. Our results indicate that shadow banking activities decrease following the establishment of the PFTZs. We attribute this reduction to increased main business investments, alleviated credit mismatches, and improved information attention. The negative effect is more pronounced in PFTZs with an administrative reporting system, among firms heavily reliant on external financing, and where bank-firm connections are weaker. Overall, this paper extends the literature on PFTZs and shadow banking by providing empirical evidence of a shift from covert financing to real-sector economic activities.