| Abstract | A theoretical model for the third class of shadow banking in China is constructed to analyze its impact on China's financial system, proposing regulatory recommendations. The third class of shadow banking offers investors chances to take on risks and get higher expected rate of return, provides an investment and financing channel for the financial system, which may improve the efficiency, and provides the bank with the convenience of improving the liquidity situation and raising the expected rate of return; it may also allow investors to take on more risks getting a lower expected rate of return, causes the loss of efficiency in the financial system, and helps financial systems absorb, hide, and cover up credit risks. It should be the direction of future regulatory reform that to strengthen the supervision of money market securities, to eliminate the phenomenon of credit enhancement, to pay attention to the characteristics of the financial market adjusting the supply of financial instruments, to monitor the quality of bank liquidity, to distinguish between balance sheet assets and off balance sheet assets and to use core tier one capital for supervision. |