Navigating Financial Sustainability: Regional Financial Structures and Corporate Shadow Banking in China

Shadow banking poses a significant challenge to China’s financial sustainability. This study examines how city-level regional financial structure influences shadow banking activities among non-financial firms, with implications for building a more sustainable financial system. Exploiting data of Chinese listed firms from 2012 to 2023 and employing fixed-effects regressions with instrumental variable (IV) and dynamic GMM approaches to address endogeneity, the study finds that bank-dominated financial structures significantly reduce corporate shadow banking financing. This effect weakens among financially constrained firms, revealing shadow banking’s role as a gap-filling mechanism, but strengthens when firms exhibit higher digitalization or market attention through enhanced information transparency. These findings suggest that achieving long-term financial sustainability requires regionally nuanced policy interventions rather than uniform regulatory tightening. Instead, policy interventions should be regionally nuanced: expanding formal credit in inland provinces can mitigate financial exclusion, while fostering corporate digitalization helps bridge the information gap between lenders and firms. Furthermore, enhancing market-based oversight is essential to redirecting capital into more transparent and regulated frameworks.