Abstract
This research investigates the system of indirect issuance of banknotes, an arrangement among domestic Chinese financial institutions to facilitate the issuance of banknotes. It occurred when a financial institution without issuing rights deposited reserves with issuing banks and received an equivalent amount of banknotes marked by the issuing bank. As a financial innovation, the indirect issuance system enabled issuing banks to promote the circulation of their banknotes while allowing non-issuing banks to expand their business operations.
Our paper represents the first empirical study to employ original datasets and extensive financial statements to analyse this system. It provides a historical survey of the system’s development and applies empirical analysis to assess the impact of indirect issuance on the income of indirect issuers. We found a positive relationship between participation in the indirect issuance system and banks’ income, underscoring its role in enhancing the financial capacity and contributing to financial development.