Evolution of the Chinese Guarantee Network under Financial Crisis and Stimulus Program

TL;DR

This study analyzes the evolution of China's guarantee network during the 2007-2012 period, revealing how financial crises and stimulus policies affected its structure, stability, and resilience using comprehensive loan data.

Contribution

It provides the first detailed analysis of the Chinese guarantee network's dynamics during financial downturns and stimulus periods, highlighting counterintuitive effects on resilience.

Findings

Guarantee network shrank and stabilized during the crisis.

Stimulus increased reciprocal guarantees, making the network fragile.

Monetary policy improved network resilience by reducing mutual guarantees.

Abstract

Our knowledge about the evolution of guarantee network in downturn period is limited due to the lack of comprehensive data of the whole credit system. Here we analyze the dynamic Chinese guarantee network constructed from a comprehensive bank loan dataset that accounts for nearly 80% total loans in China, during 01/2007-03/2012. The results show that, first, during the 2007-2008 global financial crisis, the guarantee network became smaller, less connected and more stable because of many bankruptcies; second, the stimulus program encouraged mutual guarantee behaviors, resulting in highly reciprocal and fragile network structure; third, the following monetary policy adjustment enhanced the resilience of the guarantee network by reducing mutual guarantees. Interestingly, our work reveals that the financial crisis made the network more resilient, and conversely, the government bailout degenerated network resilience. These counterintuitive findings can provide new insight into the resilience of real-world credit system under external shocks or rescues.