Research on the threshold of symbiosis between finance and real economy – empirical test based on banking panel threshold model

Conglai Fan, Xinlei Cai and Jian Lin

China Political Economy, 2021, vol. 4, issue 2, 146-169

Abstract: Purpose - Starting from the theoretical mechanism of profit sharing between finance and the real economy, this paper reviews and analyzes the profitability of China's banking industry and makes a horizontal comparison with the banking industry of the United States, Japan, and Germany. Design/methodology/approach - Based on the panel threshold model, it is found that there is a dual-threshold asymmetric effect between banking profit and the growth of real economy. When the net profit rate of the banking industry is lower than 0.491%, the increase in banking profitability will inhibit the growth of real economy due to profit grabbing; when the rate falls within the range of 0.491–0.801%, the increase in bank profitability is conducive to the growth of real economy. Findings - Finance and the real economy are in the most comfortable symbiotic state; when the rate is higher than 0.801%, the continued increase in bank profitability will weaken the promotion effect of finance on the real economy, but bank profitability and the growth of real economy are still in a symbiotic state of positive promotion. Originality/value - The promotion effect of China's bank profitability to the growth of real economy has shifted from the suboptimal state to the optimal range as a whole, which is attributed to the strong deleveraging and strict supervision of the Chinese government after 2016, the timely and decisive “stepping on the brakes”, pulling the financial sector back from the “illusion” caused by “self-circulated” profits and preventing it from harming the real economy.

Keywords: Banking profit; Real economy; Threshold effect; Reform path (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cpepps:cpe-11-2021-0013

DOI: 10.1108/CPE-11-2021-0013

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