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Climate risks and financial stability: Evidence from China

Author

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  • Zhao, Xuejin
  • Yao, Xinbin
  • Huang, Jiayi

Abstract

In recent years, extreme high-temperature events and other climate disasters have occurred frequently around the world, and climate risks have become one of the sources of financial risks. This paper clarifies the transmission mechanism of climate risks and empirically analyzes the impact of climate change on regional financial risk based on data from 31 provinces in China. The theoretical analysis indicates that climate risks affect the financial system through the real economy, and the economy and finance in turn affect the climate through low-carbon transformation, forming a complex network transmission mechanism of the “Climate-Economy-Finance” dual circulation. The empirical results confirm that climate change significantly increases regional financial risk at the national level. Specifically, regions with developed economies and high insurance coverage have stronger capabilities to resist climate risks. In terms of transmission mechanism test, climate risks propagate into financial markets through multiple channels, including deterioration of corporate operating performance, increase in non-performing loan ratios, expansion of government fiscal deficits, and obstruction to macroeconomic development. This study enriches the existing research on climate risks and provides references for the financial industry to improve its climate risk management capabilities.

Suggested Citation

  • Zhao, Xuejin & Yao, Xinbin & Huang, Jiayi, 2025. "Climate risks and financial stability: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 104(PA).
    • Handle: RePEc:eee:finana:v:104:y:2025:i:pa:s1057521925003941
    DOI: 10.1016/j.irfa.2025.104307
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