Abstract : This study examines the effects of shadow banking activities on the financial stability of the Chinese banking system. Moreover, it assesses whether the relation between financial stability and shadow banking activities changes for banks having political connections. The findings suggest a significant positive effect of shadow banking on the credit risk as well as the financial stability of Chinese banks. The growth of shadow banking activities has a significantly positive effect on Chinese commercial banks lowering the default risk and this relationship is incrementally significant for financial institutions having political connections. These findings are robust by controlling for various bank-specific and macroeconomic conditions