How Effective are Macroprudential Policies in China?

Abstract

This paper investigates macroprudential policies and their role in containing systemic risk in China. It shows that China faces systemic risk in both the time (procyclicality) and crosssectional (contagion) dimensions. The former is reflected as credit and asset price risks, while the latter is reflected as the links between the banking sector and informal financing and local government financing platforms. Empirical analysis based on 171 banks shows that some macroprudential policy tools (e.g., the reserve requirement ratio and house-related policies) are useful, but they cannot guarantee protection against systemic risk in the current economic and financial environment. Nevertheless, better-targeted macroprudential policies have greater potential to contain systemic risk pertaining to the different sizes of the banks and their location in regions with different levels of economic development. Complementing macroprudential policies with further reforms, including further commercialization of large banks, would help improve the effectiveness of those policies in containing systemic risk in China.

Loan-to-Value Policy as a Macroprudential Tool: The Case of Residential Mortgage Loans in Asia

“…2 The Chinese experience in the use of LTV is not as clear as that of Hong Kong, China as reported by Wang and Sun (2013). They suggested that, compared to LTV, the required reserve ratio (RRR) seemed to be a more successful policy variable in containing systemic risk in the PRC.…”

“…Since LTV policies target mortgage loans, this is the item in banks' balance sheets that should be analyzed rather than some measure of overall financial stability, as in much of the previous literature. Other studies with a bank-level approach include Claessens et al (2013) and Wang and Sun (2013). This study makes a number of contributions to the literature in this area.…”

Determinants and Sustainability of House Prices: The Case of Shanghai, China

“…The use of the neutral words "stable prices" in the policy indicated that the central government believed that house prices could be controlled using macroprudential measures. It has been indicated that the Chinese government has used a macroprudential policy toolkit in order to curb the increase in house prices [74]. However, housing policy for house prices has significantly changed ever since.…”

Is finance a veil? Lead‐and‐lag relationship between financial and business cycles: The case of China

“…Thus, when production expands, there might be no need to build new plants and houses since there are already huge inventories in the government's view. Next, the macro-prudential policy also targets the heated housing market, since compared with other countries, house prices in China have increased more rapidly than during the housing booms in Korea, the UK, and the United States (Wang & Sun, 2013). The expansion of the real sector can fuel the already heated housing market and therefore jeopardize the financial system.…”

“…Consequently, mortgages significantly decreased between 2010 and 2011, and the trend of rising house prices was restrained following implementation of these instruments. This decrease means that macroprudential instruments have had the intended effect of reducing house prices (Wang & Sun, 2013). Third, the central government issued a series of intervention policies, such as a minimum down payment ratio and higher mortgage rates for a second home in early 2005, and the housing purchase restriction policy was the most stringent.…”