Measuring the Instability of China’s Financial System: Indices Construction and an Early Warning System

Abstract

In this paper, employing several econometric techniques, the authors construct a financial stress index (CNFSI) and a financial conditions index (CNFCI) to measure the instability of China's financial system. The indices are based on the monthly data collected from China's inter-bank markets, stock markets, foreign exchange markets and debt markets. Using these two indices, the authors identify the episodes of systemic financial stress, and then evaluate the indices. The empirical results suggest that the CNFSI performs better than the CNFCI. Furthermore, the authors propose four leading indicators for monitoring China's financial instability, and provide a primary early warning system for China's macroprudential regulations. Finally, they conduct a test to evaluate the predictive power of the CNFSI and the early warning system with reference to the 2015 episode. Their results suggest that both work well. JEL G18 C43 E44

The Casual Relationship between China’s Financial Stress and Economic Policy Uncertainty: A Bootstrap Rolling-Window Approach

“…we refer toSun and Huang (2016) to build the latest CNFS 2 index[28], becauseChina's government does not offer an official CNFS index. The corresponding data come from China Economic Information Network (CEIN), People's Bank of China (PBoC), and the National Bureau of Statistics (NBS).…”