Abstract: To support China’s massive stimulus plan in response to the global financial crisis in 2008, large state-owned banks pumped huge volume of new loans into the economy and also grew more aggressive in the deposit markets. The extent of supporting the plan was different across the ‘Big Four’ banks, creating a plausibly exogenous shock in the local deposit market to small and medium-sized banks (SMBs) facing differential competition from the Big Four banks. We find that SMBs significantly increased shadow banking activities after 2008, most notably by issuing wealth management products (WMPs). The scale of issuance is greater for banks that are more constrained by on-balance sheet lending and face greater competition in the deposit market from local branches of the most rapidly expanding big bank. The WMPs impose a substantial rollover risk for issuers when they mature, as reflected by the yields on new products, the issuers’ behavior in the inter-bank market, and the adverse effect on stock prices following a credit crunch. Overall, the swift rise of shadow banking in China seems to be triggered by the stimulus plan and has contributed to the greater fragility of the banking system.