An Index System for Financial Safety of China
Abstract: This paper combines
a synthetic index system by the variables and evaluates China’s financial
safety through the change of indexes in a comprehensive way. First of all, it
builds the financial industry evaluation index system composed of 25indicators
in terms of the operation of the financial industry and external economic
environment and particularly takes into consideration factors which might
trigger liquidity risks such as off-balance-sheet business, interbank business
and shadow banking; then it selects 10 indicators to conduct empirical analysis
and identifies the indicator weight through principal component analysis;
finally it combines the financial safety indexes through the linear weighted
comprehensive evaluation model.
Design/methodology/approach: Synthesis of indexes is made by constructing
a proper comprehensive evaluation mathematical model, integrating a number of
evaluation indexes into one comprehensive evaluation index and then obtaining
corresponding comprehensive evaluation results. In this paper, it selects 10
indexes to conduct empirical analysis and identifies the index weight through
principal component analysis; finally it combines the financial safety indexes
through the linear weighted comprehensive evaluation model. Principal component
analysis (PCA) is a statistical procedure that uses an orthogonal
transformation to convert a set of observations of possibly correlated
variables into a set of values of linearly uncorrelated variables called
principal components. PCA was invented in 1901 and was later independently
developed (and named) by Harold Hotelling in the 1930s.
Findings: From 2003 to 2013 China’s financial safety indexes fluctuated.
From 2003 to 2007 indexes rose, which indicates China’s financial safety status
gradually improved; from 2007 to 2009 indexes declined, which indicates due to
the impact of subprime crisis, China’s financial safety status took a turn for
the worse; from 2009 to 2012 indexes rose, which indicates the external
environment improved so did China’s financial safety status; from 2012 to 2013
indexes declined because due to the rapid development of banks’ financial
products and trust products, banks’ off-balance-sheet assets and liquidity
risks increased. The changes of financial safety indexes are generally
identical with those of China’s financial safety status.
Research limitations/implications: In the empirical analysis part, this
article tries to selective 24 indicators synthetic index of China's financial
security, but due to some of the indicators data acquisition is relatively
difficult, can only Selective 10 of 25 indicators and gather the annual data of
10 indicators from 2003 to 2013 to synthetic index. The information of
eliminated indicators cannot be reflected in the index. Index change also does
not reflect of the risk from these indicators. In order to make up for the
above limitations, this paper is mainly to introduce and analysis our latest
financial institutions business trends associated with these eliminated
indicators to get the conclusions more reliable.
Originality/value: The aim of this research is to estimate financial
safety of China with the application of the index of financial safety of a
country using the annual data of 2003-2013. Through synthetic index of
financial security measure the risks of China's financial system, provide the
basis for the government macro financial policy. The Originality of the paper
is mainly manifested in incorporating factors which have made important impacts
on China’s financial safety in recent years, but have not been taken into
consideration in the existing studies into the newly constructed financial
safety index system. For example, some factors that cannot be controlled easily
might have huge hidden risk hazards. To be more specific, factors such as
off-balance-sheet business, interbank business and shadow banking might trigger
liquidity risks. In this way, the research results will be more practical.
Author: Xiaojun Jia, Menggang
Li
Journal Code: jptindustrigg150066
