Systemic risk in the Chinese banking sector Image The resilience of the Chinese banking system has been a subject of scrutiny over the past decade due to its individual characteristics, such as concentration, rapid asset growth, importance of shadow banking, opaque interconnectedness of financial firms, and the increased international clout of Chinese banks. The rapid expansion of the Chinese stock market poses opportunities and risks for international investors and greatly affects the performance of emerging markets, as benchmarked by common indices such as the MSCI EM. In our paper, we shift focus from the largest, state-owned, and globally important banks, to the relatively smaller financial institutions and examine whether they contribute significantly to the systemic risk and interconnectedness of the Chinese banking sector. We also examine if three often-discussed sources of fragility—increased housing prices, economic policy uncertainty, and shadow banking—contribute to the magnitude of systemic risk in banks. We find that systemic risk has been persistently rising after the global financial crisis, with smaller institutions, in our sample covering about 50% of total banking assets, contributing more than 40% to total systemic risk in 2017–18. Our results show that increased housing prices, policy uncertainty, and shadow banking serve as a cause of systemic risk in the long and short runs. Shadow banking also contributes to the increase in housing prices. Finally, smaller banks appear to be more interconnected than their large counterparts and have greater influence than previously believed.