The Research Of China's Credit Cycle

Since nearly 30 years of reform and opening up, China's credit has kept a fast developing momentum with an quarterly average growth rate of 4.5%. The persistent expansion of credit may be a fuse of crisis in the economic system. Thus it is necessary to analysis the credit cycle in China. Because the size of credit is keeping growing during this period, focusing on the size makes no sense. Here we decide to use the quarterly growth rate of credit since 1980 for our research of China's credit cycle.At the beginning, this paper anticipates that there exist two regimes in China's credit cycle. Then Markov Regime Switching Model, which takes the regime-switch as an endogenous variable and a random process, is adopted in the empirical analysis. More specifically, this paper uses Two Regime Markov Switching mean and variance with AR(2) Model, and calculates the average expected durations and smoothed probabilities of the two regimes. The conclusions are present as follow: 1) The two regimes of China's credit cycle are described as "High Growth Rate & High Volatility" and "Moderate Growth Rate & Low Volatility"; 2) The average expected duration of "High Growth Rate & High Volatility" regime is very short, by contraries the average expected duration of "Moderate Growth Rate & Low Volatility" regime is much longer; 3) China's credit cycle is asymmetric. To be more detailed, the "Moderate Growth Rate & Low Volatility" regime is the main state lasting for almost the whole period, but the "High Growth Rate & High Volatility" regime is represented as several transitory shocks in the moving process, which results in the great fluctuation on the credit size in the short time.According to the inflexion points of the regime switching proposed by the smoothed probabilities charts, this paper analyzes the main reasons hidden behind the growth trend and the shocks on the cycle. From the review of the economic phenomenon at these inflexion points, this paper summarizes the basic rule of credit cycle. Rapid economic growth and the reform of the related policies of credit regulations both push the credit expansion, contributing to the up tendency of the credit size in the long term. However, if the credit expands to some degree that beyond the real need, over-investment and inflation will become the serious problems in the economic system and the crisis may explode because of the gathering risk of loan and investment. Several monetary policies should be taken to restrain the credit expansion. At this short period, the one side is the overheated economy, the other is the prudent policy. These two opposite power of the market and government make the credit size of great uncertainty, which is reflected by the fluctuation in the growth rate moving. But this phenomenon will not last for a long time since the China's character of "Strong Government", which may make the macro-controlling policy more effective.Finally, based on the analysis and conclusions, this paper proposes that we should develop security market to reduce the stress of need for banking funds, adjust the credit structure of commercial banks, regulate the appropriate scale and control the negative influence of the credit expansion or contraction.