Research On The Effect Of Banking Market Structure On Macroeconomic Volatility In China

Since the1980s, macroeconomic volatility has flattened in many developedcountries and regions, and many scholars attributed this phenomenon to the increasinglevel of financial development. The similar situation that macroeconomic volatilityhas been narrowing has also appeared in China. According to available data fromNational Bureau of Statistics, the annual growth rate of private industrial enterprisesabove designated size from2004to2012is35%. And the private sector has become astrong force of the economic development of China. At the same time, the reform ofChina’s financial system, the core of which being the commercializing of banking, hasmade remarkable progress. The banking market structure has undergone tremendouschanges in China. And it has changed from the unified market in charge of People’sBank of China to monopolistic competition market where there are four maincompetitors, ICBC, ABC, CCB and BOC. Commercial banks play a direct function ofcapital allocation in the macroeconomic development, which is very important.Current international economic situation is not optimistic and the domestic economicrestructuring is imminent. The research of market structure of the banking sector andmacroeconomic volatility is of great significance to help the government find ways toensure steady economic growth.Based on the basic theory of the banking market structure and macroeconomicvolatility, this paper analyses change of China’s banking market structure and thestatus of China’s banking market structure, then evaluates the condition ofmacroeconomic volatility in recent years. Combined sample data from1994to2012,this paper measures the effect of the banking market structure on macroeconomicvolatility. After dividing the macroeconomic volatility into the state-owned sector andthe non-state-owned one, this paper tries to assess the different impact.The main contents of this paper include the following four aspects:Firstly, this paper introduces the concept and measure of market structure. Andbased on the credit market equilibrium model, the paper analyses multiple effects ofthe development of commercial banks on economic volatility.Then main models andmethodology used in the research are introduced. All these lay the theoreticalfoundation for the following study.Secondly, the paper reviews the changes of China’s banking market structure. And based on measurement of CRn, HHI and other indexes, the paper judges status ofChina’s banking market structure. Using HP filter method processed the original timeseries data, the paper constructed index to analyse macroeconomic volatility.Third, after leading-in sample data from1994to2012, the paper conduct unitroot test, cointegration test and Granger causality test to three time series index, indexof macroeconomic volatility, deposit concentration, loan concentration. On the basisof a vector auto regression model, it assesses the direction and extent of effect ofChina’s banking market structure on economic volatility by the impulse response andvariance decomposition analysis.Finally, the economy is divided into state-owned one and non-state-owned one.After leading-in sample data from1998to2012, the paper conduct unit root test,cointegration test and Granger causality test to three time series index, index ofstate-owned macroeconomic volatility, non-state-owned one and loan concentration.Based on a vector auto regression model, it assesses the difference among thedirection and extent of effect of China’s banking market structure on state-ownedeconomic volatility and non-state-owned one by the impulse response and variancedecomposition analysis.The main innovations of this paper lie in the following two aspects:First, by leading in a series of mandatory policies issued by the Chinesegovernment, this paper analyses change of China’s banking market structure andjudges the status of China’s banking market structure.Second, from the perspective of banking concentration this paper gives a deepanalysis of the mechanism of the banking market structure affecting macroeconomicvolatility, which expandes the existing financial development and economic volatilityresearch. Using data of banking market structure changes and macroeconomicvolatility in China, the paper conducts an empirical test. After dividingmacroeconomic into state-owned economy and non-state-owned economy, the papertests the different effect of the banking market structure on them.