Characterizing the Evolution of China's Financial Cycle: An Empirical Analysis

Wang Yan

Abstract: In this paper, the macro-economy and financial environment before and after the occurrence of high financial stress was analyzed, and then the characteristics of the evolution of financial instability were given. Through the studies of financial variables' cyclical features, China's financial cycle was determined. Furthermore, by comparing the financial cycle with the business cycle, the relationship between the financial cycle and the business cycle was analyzed. The findings were: before the occurrence of the high financial stress, the macro-economy was booming, however, after the high financial stress occured, everything reversaled, the economic growth declined to a lower level, the loans reduced and the asset prices declined rapidly; in the sample period, China's financial system had gone through three major recessions. China's financial cycle keeps ahead of the business cycles generally, which means that the recession of financial system can be an early warning signal of a following economic downturn.

Keywords: Financial Instability Financial Stress Financial Cycle Turning Point Analysis