Network Topography and Default Contagion in China’s Financial System

35 Pages Posted: 1 Apr 2020 Last revised: 12 Aug 2020

See all articles by Jens Fittje

Jens Fittje

University of Hagen (Fernuniversitaet in Hagen)

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen)

Date Written: July 1, 2020

Abstract

The topography of China’s financial network is unique. Is it also uniquely robust to contagion? We explore this question using network theory. We find that networks that are more concentrated are less fragile when connectivity is low. However, they remain vulnerable to the occurrence of large-scale default cascades at higher levels of connectivity then a decentralized network. We implement Chinese characteristics into our model and simulate it numerically. The simulations show, that the large state-controlled banks act as effective stopgaps for contagion, which makes the Chinese network relatively robust. This robustness persists even when a medium sized bank defaults.

Keywords: China, Default Risk, Default Contagion, Network Topography, Random Graph, Financial Network

JEL Classification: E40, E44, G01, G21

Suggested Citation

Fittje, Jens and Wagner, Helmut, Network Topography and Default Contagion in China’s Financial System (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3549926 or http://dx.doi.org/10.2139/ssrn.3549926

Jens Fittje (Contact Author)

University of Hagen (Fernuniversitaet in Hagen) ( email )

Universitätsstrasse 41
Feithstrathe 140
Hagen, 58084
Germany

Helmut Wagner

University of Hagen (Fernuniversitaet Hagen) ( email )

Universitätsstrasse 41
Feithstrathe 140
D-58084 Hagen
Germany
011-49-2331-987-2640 (Phone)
011-49-2331-987-391 (Fax)

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