Abstract: In recent years, the scale of shadow banking has grown rapidly in China. At the same time, the Chinese government repeatedly highlights the importance of preventing systemic financial risk. Since the shadow banking activity is outside the regulatory system, the risk of shadow banking is widely concerned. However, limited by the availability of micro-data, few papers empirically examine the risk of shadow banking. Fortunately, the Chinese listed companies disclosed the information of entrusted loans, which is a typical shadow banking mechanism. Using entrusted loans data of listed companies in China from 2004 to 2015, the risk of shadow banking in China is empirically examined in this paper. The data show that the default rate of entrusted loans is 10.09%, which is much higher than the non-performing loan ratio of banking financial institutions in the same period(1.94%). Moreover, the default of entrusted loans is more obvious for the real estate industry or in central and western China. Further, multiple regression methods are used to examine shadow banking riskfrom the perspective of collateral and distance. The results indicate that both the collateral and the distance affect the default rate of the entrusted loan. First, the collateral and the loan default rate are significantly positively correlated. This shows that in order to prevent the moral hazard problem, the lender will ask the borrower to provide collateral. Second, the distance between the lender and borrower is significantly and positively related to the default rate, which means that the farther the distance is, the harder it is for the lender to distinguish and supervise the borrower, thus pushing up the default ratio of entrusted loans. This study not only provides direct empirical evidence for the default risk of the shadow banking system in China, but also has important implications for shadowing banking participants and supervision.

Key words: shadow banking, default risk, collateral, distance, entrusted loans