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Credit risk and macroeconomic stress tests in China

Abstract

This paper examines the vulnerability of commercial banks in China to the changes in macroeconomic conditions by employing a macroeconomic stress test. We particularly focus on how the changes in housing market-related variables and the scale of shadow banking influence the credit risks of China’s entire banking system. Based on the result of a vector autoregression model, we proceed with a five-scenario analysis. Our main finding is the ability of shadow banking to absorb the credit risks of commercial banks rather than there being a spill-over effect, according to the data from Q1 2005 to Q2 2016. Moreover, the mortgage loan is risky to commercial banks during this period. In addition, our scenario analysis suggests that China’s banking system is relatively stable and that the Central Bank of China is capable of monitoring the credit risks of commercial banks using appropriate credit policies.

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Fig. 1

Source China Banking Regulatory Commission (Q1 2005–Q2 2016) and Author’s Model Forecast (Q3 2016–Q4 2018)

Fig. 2

Source China Banking Regulatory Commission (Q1 2005–Q2 2016) and Author’s Model Forecast (Q3 2016–Q4 2018)

Notes

  1. See “Property loans, the glass chin of China banks”. Available at http://www.reuters.com/article/us-china-banks-realestate-idUSKCN0YG05Z.

  2. The non-performing loan ratio is published by China Banking Regulatory Commission.

  3. We convert the monthly data into quarterly data.

  4. We assume the scale of shadow banking increases (decreases) under the scenario of expansionary (tightening) credit policy because of our above argument that the relationship between shadow banking and regular banking are complementary.

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Correspondence to Maggie Mo Jia.

Appendices

Appendix 1

See Table 4.

Table 4 Explanation of the variables used for the estimation.

Appendix 2

See Tables 5, 6 and 7.

Table 5 Phillips-Perron test.
Table 6 GLS-based Dickey–Fuller test.
Table 7 Kwiatkowski–Phillips–Schmidt–Shin test.

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Cite this article

Arestis, P., Jia, M.M. Credit risk and macroeconomic stress tests in China. J Bank Regul 20, 211–225 (2019). https://doi.org/10.1057/s41261-018-0084-1

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  • DOI: https://doi.org/10.1057/s41261-018-0084-1

Keywords

  • Macroeconomic stress test
  • Vector autoregression
  • Banking system
  • Central bank
  • Shadow banking

JEL Classification

  • E58
  • G21