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

【Authors】
JIA Yanyan, FANG Yi, JING Zhongbo
【WorkUnit】
Central University of Finance and Economics, 100081.
【Abstract】

Smooth operation of the financial system can promote economic growth by absorbing risks, while an outbreak of risks in the financial system will drag down economic development through risk spillover and amplification. Based on this, this paper uses secondary industry indexes to build a risk spillover network between the real economy and the financial system, and discusses the risk absorption and amplification effect exerted by the financial system on China's economic and financial systems from an industrial perspective. The findings are as follows: First, on the whole, the real economy is the source of risks in China's economic and financial system. The financial system plays the role of risk absorption in China's economic and financial system, performing its function of professional risk management. Risk absorption of the financial system is positively correlated with the risks of the real economy, and negatively correlated with the risks of the financial system. In addition, the more financial system risk exceeds real economy risk, the stronger the risk amplification effect of the financial system will be; and the more real economy risk exceeds financial system risk, the greater the risk absorption effect will be. Second, among the different industries within the financial sector, the banking industry has the closest relationship with the real economy and thus the lowest risk absorption capacity. Third, within the financial system, the internal relationships between different industries are asymmetric. The diversified financial industry has a stronger risk spillover effect on the banking industry and the insurance industry, while the insurance industry has a stronger risk spillover effect on the banking industry. These results are essentially related to the functioning of the financial system, the internal relationships of the financial system, and the relationship between the financial system and the real economy.

JEL:E44, G21, G28

【KeyWords】
Financial System, Real Economy, Risk Absorption, Risk Amplification