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Creating Financial Cycles in China and Interaction with Business Cycles on the Chinese Economy

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  • Chung-Hua Shen
  • Jun-Yu Ren
  • Yu-Li Huang
  • Jun-Guo Shi
  • An-Qi Wang

Abstract

This study creates a Chinese financial cycle index to examine the lead-and-lag relations between business and financial cycles. We examine the macroeconomic performance when these cycles are in boom, bust, and other combinations. We have four interesting results. First, financial cycles occur less frequently than business cycles. Second, the upturn phase of a financial cycle is significantly longer than the downturn phase. Third, gross domestic product growth rates are at their lowest when the two cycles are in troughs and the highest when they reach their peaks. We find similar results for employment, inflation, and consumption rates. Fourth, financial cycles lead business cycles but not vice versa. Hence, policymakers should consider the financial system before bailing out the real economy, which alone is insufficient for the recovery of the macro economy.

Suggested Citation

  • Chung-Hua Shen & Jun-Yu Ren & Yu-Li Huang & Jun-Guo Shi & An-Qi Wang, 2018. "Creating Financial Cycles in China and Interaction with Business Cycles on the Chinese Economy," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(13), pages 2897-2908, October.
    • Handle: RePEc:mes:emfitr:v:54:y:2018:i:13:p:2897-2908
    DOI: 10.1080/1540496X.2017.1369402
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    Cited by:

    1. Shengnan Lv & Zeshui Xu & Xuecheng Fan & Yong Qin & Marinko Skare, 2023. "The mean reversion/persistence of financial cycles: Empirical evidence for 24 countries worldwide," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 11-47, March.
    2. Saini, Seema & Ahmad, Wasim & Bekiros, Stelios, 2021. "Understanding the credit cycle and business cycle dynamics in India," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 988-1006.
    3. Mariya Gubareva & Maria Rosa Borges, 2022. "Governed by the cycle: interest rate sensitivity of emerging market corporate debt," Annals of Operations Research, Springer, vol. 313(2), pages 991-1019, June.
    4. Li, Xiao-Lin & Yan, Jing & Wei, Xiaohui, 2021. "Dynamic connectedness among monetary policy cycle, financial cycle and business cycle in China," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 640-652.

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