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Saving and Investment in China

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					Subprime problems and global financial sector
turmoil—the impact on China’s economy, financial
system, and implications for policy

  CBRC Banking Forum
  September 21, 2007
  Louis Kuijs,
  World Bank Beijing
     Outline
   What happened in the US and global financial markets?
   What may be the impact on the global economy and
    financial system?
   Possible impact on China
       Via direct exposure of China’s financial institutions
       Via financial market channels
       Economic impact
            Simulation results
            What about decoupling?
   Policy considerations
       Macro policy
       Structural policies in the financial sector
The scale of things
          The US Subprime Mortgage             Market    in
          Perspective (US$ Trillion).

          Total US Mortgage market                    10
                 o/w sub-prime                        1.5
                 o/Adjustable Rate Mortgage          0.75
                        o/w securitized              0.15

          Memorandum Items

          World Debt Securities                      39.0
                  o/w Domestic Debt Securities       20.5
                  o/w International Debt Securities  18.4
          US Collateralized Debt Obligations        0.9-1.2
          Global Collateralized Debt Obligations    1.5-2.0
          Credit Default Swaps (Notional Amount)     28.8
                  o/w Gross Market Value              0.5
          World Stock market Capitalization          50.1
          World GDP                                  45.1
          Source: BIS, Chicago Federal Reserve bank, IMF,
          Financial Times, Credit Lyonnais.
Relaxation of credit standards


      Underwriting Standards in Subprime Home-Purchase Loans
           ARM     Interest-Only Low- No- Debt Payments-to-Average Loan-to-
           Share    ARM Share    Doc Share  Income Ratio     Value Ratio

    2001   73.8%         0.0%     28.5%         39.7            84.04
    2002   80.0%         2.3%     38.6%         40.1            84.42
    2003   80.1%         8.6%     42.8%         40.5            86.09
    2004   89.4%         27.2%    45.2%         41.2            84.86
    2005   93.3%         37.8%    50.7%         41.8            83.24
    2006   91.3%         22.8%    50.8%         42.4            83.35

  Source: Freddie Mac.
Credit worsening in the US sub
prime mortgage market
                       -
           Subprime 60 Day Delinquencies by Mortgage Vintage Year
               (adjustable rate mortgages, in percent of payments due)


     12%
                       2006
     10%


       8%                                 2005


       6%
                                                    2004

       4%
                                                                     2003
       2%


       0%
              0    5   10     15   20     25   30   35     40   45   50   55   60   65   70   75   80

                                        Months after Origination

 Source: JPMorgan Chase & Co.
Chain of events




     Source: Hofman (2007)
Risk is being reassessed




        Source: JP Morgan Chase and Co
However, so far, spill-over to emerging
markets remains low
   2,000.0
                      Emerging Market Bond Index Spreads 12/31/1993 - 8/10/2007
                                                                                                             JPMPTOT(BSPRD) U$
   1,800.0
                                                                                                             JPMPASI(BSPRD) U$

   1,600.0                                                                                                   JPMPBRA(BSPRD) U$

                                                                                                             JPMPRUS(BSPRD) U$
   1,400.0
                                                                                                             JPMGCHN(BSPRD) U$


   1,200.0



   1,000.0



    800.0



    600.0



    400.0



    200.0



       0.0
       12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06

                                      Source: Bloomberg
Possible impact on China

    Via direct exposure of China’s financial
     institutions
    Via financial market channels

    Economic impact
        Simulation results
        What about decoupling?
Effect on China’s financial markets
is so far limited
    China
      Capital account relatively closed
      Large current account surplus puts upward
       pressure on the exchange rate and feeds
       liquidity
      Strong growth and confidence
      Insurance (reserves)

     limited effect on domestic financial
     markets
Impact via economic linkages

    Economic impact in US (and other
     countries)
      Wealth effects
      Repricing of risk

      Housing market
The economic impact would affect
China’s economy
         Table. Impact of a consumption slowdown in the US
               (Impact on GDP in first year, in percent)

            Normal monetary policy No/no effective monetary
            response in the US     policy response in the US
 US                    -0.9                    -1.0
 Brazil                -0.1                    -0.3
 China                 -0.2                    -0.5
 India                 -0.1                    -0.2
 Indonesia              0.0                    -0.3
 Russia                 0.0                    -0.2
 South Africa           0.1                    -0.2
 Turkey                -0.1                    -0.2
 Source: World Bank staff estimates, using the OEF model.
However, China is well-placed to
absorb the economic impact
    Global slowdown
      Lower overall growth
      Lower exports and trade surplus

      Lower commodity prices and inflation

    More drastic slowdown
        China has room  policy easing is possible,
         if necessary
Financial sector policy implications

   Monitoring and reviewing
   Structural policies in the financial sector
To watch
    Developments in international capital market
     (link up with BIS, IMF, WB)
    Unusual sales patterns in capital market
     (CSRC)
    Interbank market liquidity and rates (PBC)
    Unusual balance of payments movements
     (SAFE)
    Exposure of financial institutions to
     international risk (CBRC, CSRC)
    Exposure of large SOEs to international risk
To review

    Contingency plans to counter possible
     financial problems (liquidity provision,
     financial institution failure)

    Exchange of information (regular
     meetings among relevant authorities-
     MOF, PBC, SAFE, CBRC, CSRC)
What are implications for financial
sector policies?
   Implications for financial regulation and
    risk management in US and other
    countries
   Implications for China

				
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posted:2/24/2010
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