A Study On The Impact Of Credit Expansion On Financial Stability Under The Structure Of "Dualistic Finance"

Credit is the main component of financial markets and an important factor affecting the stable operation of financial market. Moderate credit growth is the power to support economic development and play a positive role in promoting one country’s economy and finance. However, at the same time of promoting rapid economic growth, excessive credit funds can also lay hidden for the stability of financial system. It is noteworthy that our country is in financial repression, there exists a financial structure of parallel formal financial and informal finance. Explore the impact of credit expansion on financial stability, it can’t ignore the impact of informal financial credit expansion, namely it needs research from the financial duality dimension.In this paper, we comprehensively and systematically analyzed mechanism and path that two different credit expansion ways of formal credit and informal credit affect the stability of financial system. Annual data from 1990-2013 is used to measure formal credit size, informal credit size and financial stability and combined with modern measurement methods, we establish appropriate model to empirically analyze. The results showed that(1)formal credit has endogenous and exogenous dual structural features, formal credit cycle component derived from endogenous factors has a short-term positive impact on financial stability, while stochastic trend component arising from exogenous factors has a long-term negative effect on financial stability, the influence of formal credit expansion on financial stability is mainly from credit stochastic trend component, which expansion will significantly reduce the level of China’s financial stability; (2) there is a threshold effect between the scale of informal credit and the stability of financial system, that when the informal credit scale is below the threshold, the informal credit expansion will improve the stability of financial system, on the contrary, it will reduce financial stability. From a practical point of view, the inflection point that China’s informal credit affect the stability of financial system has occurred, the expansion of informal credit is not conductive to the stability of financial system. Finally, this paper puts forward some policy recommendations.