Does China’s Financial System Amplify Risks in the Real Economy?

Jia Yanyan, Fang Yi and Jing Zhongbo ()
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Jia Yanyan: Doctorate Candidate at the Chinese Academy of Finance and Development of the Central University of Finance and Economics, Ulan Bator, Mongolia
Fang Yi: Associate Professor at the School of Finance of the Central University of Finance and Economics, Beijing, China
Jing Zhongbo: Associate Professor at the School of Management Science and Engineering of the Central University of Finance and Economics, Beijing China

China Finance and Economic Review, 2021, vol. 10, issue 1, 3-25

Abstract: The smooth operation of the financial system can promote economic growth by absorbing risks, while the risks breaking out in the financial system will drag down economic development through risk spillovers and amplification. On this basis, this paper uses secondary industry indices to build a risk spillover network between the real economy and the financial system, and discusses the risk absorption and amplification role of the financial system in China’s economy and finance from the perspective of industry. First, on the whole, the source of risks in China’s economic and financial system lies in the real economy. The financial system plays a role of risk absorption in China’s economic and financial system, demonstrating the professional risk management functions of the financial system. The risk absorption of the financial system is positively correlated with the risks in the real economy, and negatively correlated with the risks in the financial system. Second, from the perspective of the correlation between the financial sub-industry and the real economy, the banking sector has the closest relationship with the real economy and the lowest risk absorption capacity. Third, from the perspective of the internal correlation of the financial system, the internal network correlation of the financial system is asymmetric. Diversified financial industry has stronger risk spillover effect on the banking industry and the insurance industry, while the insurance industry has stronger risk spillover effect on the banking industry. These results are essentially related to the functioning of the financial system, the internal relationship of the financial system and the relationship between the financial system and the real economy.

Keywords: financial system; real economy; risk absorption; risk amplification (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:cferev:v:10:y:2021:i:1:p:3-25:n:3

DOI: 10.1515/cfer-2021-0001

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