Default clustering of the nonfinancial sector and systemic risk: Evidence from China

Abstract

How nonfinancial sector affects the financial system has not been fully studied in the literature. Using data on 327 listed companies over the period 2007–2016, we extend the default clustering estimation to nonfinancial sector and document clear time-varying and cross-sectional variations of the default clustering in different nonfinancial industries in China. We find that stock market volatility, fixed asset investments and Credit-to-GDP gap are the key determinants of the time series default cluster variations. We further examine how these nonfinancial sector default clusters are related to the systemic risk measured by the default clustering and CoVaR in banking. We show that Manufacturing, Wholesale Retail, and Real Estate industries demonstrate high correlations with systemic risk, suggesting the importance of monitoring these industries as part of the macroprudential policy. Overall, our study highlights the importance of taking into consideration of nonfinancial sector to maintain the overall health of the financial market.