Financial Vulnerability, Capital Shocks and Economic Growth: Evidence from China (2005—2014)

  • Chunpeng Zhang Northwest University,China
  • Rong Kang Northwest University,China
  • Chen Feng Northwest University,China
Keywords: banking industry, financial vulnerability, capital shocks, economic growth, China, measurement


Taking the leading role of the banking industry in the financial system into consideration, this paper constructed a financial vulnerability index by using the method of principal component analysis, and found China’s financial vulnerability showed a slightly upward trend in general. In order to confirm the macro factors affecting financial fragility, dynamic regression models were constructed. As a result, the authors obtained seven major macro factors. Finally, the authors determined that an overheated economy, increasing inflation, excessive growth of the country’s fiscal expenditures, and export shocks will increase financial vulnerability. However, the increasing investment in real estates and fixed assets may reduce the risk in the financial market. Therefore, China needs to adapt to the new normal economic development model, weaken government intervention in the financial markets, deepen financial reforms, and maintain steady development in the financial system.

Author Biographies

Chunpeng Zhang, Northwest University,China
Department of world economy and trade, School of Economics and Management, Northwest University
Rong Kang, Northwest University,China
Department of world economy and trade, School of Economics and Management, Northwest University
Chen Feng, Northwest University,China
Department of world economy and trade, School of Economics and Management, Northwest University


Beck, T., Demirgüç-Kunt, A. and Levine, R. 2003. Bank Concentration and Crises. World Bank Working Paper.

Bekaert, G. and Harvey, C. R. 2000. Foreign Speculators and Emerging Equity Markets. Journal of Finance, 55, 565–614.

Brave, S. and Butters, R. A. 2011. Monitoring Financial Stability: A Financial Conditions Index Approach. Economic Perspectives, 35 (1), 22.

Chen, H. and Wu, Z. 2004. A Theory and Empirical Analysis on the Fragility of China's Banking System. Research on Quantity Economy and Technology Economy in China, 9, 120–135.

Chen, S., Shao, Z. and Yang, D. 2011. Identification and Prediction on Vulnerability of China's Banking System. Zhejiang Finance in China, 9, 44–50.

Diamond, D. W. and Dybvig, P. H. 1983. Bank Runs, Deposit Insurance, and Liquidity. Journal of Political Economy, 91 (3), 401–419.

Fell, J. and Schinasi, G. 2005. Assessing Financial Stability Exploring the Boundaries of Analysis. National Institute Economic Review, 192, 682–697.

Hatzius, J., Hooper, P., Mishkin, F. S., Schoenholtz, K. L. and Watson, M. W. 2010. Financial Conditions Indexes: A Fresh Look after the Financial Crisis. NBER Working Paper No. 16150.

He, D. and Lou, F. 2011. The Measurement and Analysis of Index of China's Financial Stability. Journal of Graduate School on Chinese Academy of Social Sciences, 4, 16–25.

Johnston, R. B., Chai, J. and Schumacher, L. 2000. Assessing Financial System Vulnerabilities. IMF Working Paper WP/00/76.

Kregel, J. A. 1997. Margins of Safety and Weight of The Argument in Generating Financial Fragility. Journal of Economics Issues, 31 (2), 543–548.

Liu, G. 2012. Improving the Local Financial Management System. Chinese Finance, 15, 82–83.

Minsky, H. 1982. The Financial Fragility Hypothesis: Capitalist Process and the Behavior of the Economy. In Kindleberger, C. P. and Laffargue, J.-P. (eds). Financial Crises. Cambridge: Cambridge University Press.

Mishkin, F. S. 1991. Anatomy of a Financial Crisis. NBER Working Paper No. 3934.

Orlowski, L. T. 2008. Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble? Economics Discussion Paper No. 43.

Tornell, A. Westermann, F. and Martinez, L. 2004. The Positive Link between Financial Liberalization, Growth and Crises. CESIFO Working Paper No. 1164.

Tropeano, D. 2013. Financial Fragility in the Current European Crisis. CITYPERC Working Paper Series, No. 09.

van den End, J. W. and Tabbae, M.. 2005. Measuring Financial Stability: Applying the MfRisk Model to the Netherlands. DNB Working Paper No. 30.

Wan, X. 2008. The Judgment and Measurement on the Vulnerability of Financial System in China During 1987–2006. Financial research in China, 6, 80–93.