Transcript Saving and Investment in China

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
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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
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Via direct exposure of China’s financial institutions
Via financial market channels
Economic impact
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Simulation results
What about decoupling?
Policy considerations
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Macro policy
Structural policies in the financial sector
The scale of things
The US Subprime Mortgage
Perspective (US$ Trillion).
Total US Mortgage market
o/w sub-prime
o/Adjustable Rate Mortgage
o/w securitized
Market
in
10
1.5
0.75
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
Share
2001
2002
2003
2004
2005
2006
Interest-Only Low- No- Debt Payments-to-Average Loan-toARM Share
Doc Share
Income Ratio
Value Ratio
73.8%
80.0%
80.1%
89.4%
93.3%
91.3%
Source: Freddie Mac.
0.0%
2.3%
8.6%
27.2%
37.8%
22.8%
28.5%
38.6%
42.8%
45.2%
50.7%
50.8%
39.7
40.1
40.5
41.2
41.8
42.4
84.04
84.42
86.09
84.86
83.24
83.35
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%
2005
8%
6%
2004
4%
2003
2%
0%
0
5
10
15
20
25
30
35
40
45
50
Months after Origination
Source: JPMorgan Chase & Co.
55
60
65
70
75
80
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
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Simulation results
 What about decoupling?
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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)
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 limited effect on domestic financial
markets
Impact via economic linkages
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Economic impact in US (and other
countries)
Wealth effects
 Repricing of risk
 Housing market
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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
Brazil
China
India
Indonesia
Russia
South Africa
Turkey
-0.9
-0.1
-0.2
-0.1
0.0
0.0
0.1
-0.1
-1.0
-0.3
-0.5
-0.2
-0.3
-0.2
-0.2
-0.2
Source: World Bank staff estimates, using the OEF model.
However, China is well-placed to
absorb the economic impact
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Global slowdown
Lower overall growth
 Lower exports and trade surplus
 Lower commodity prices and inflation
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More drastic slowdown
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China has room  policy easing is possible,
if necessary
Financial sector policy implications
Monitoring and reviewing
 Structural policies in the financial sector
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To watch
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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
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Contingency plans to counter possible
financial problems (liquidity provision,
financial institution failure)
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Exchange of information (regular
meetings among relevant authoritiesMOF, 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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