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CBRC Banking Forum September 21, 2007 Louis Kuijs, World Bank Beijing

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?

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CBRC Banking Forum September 21, 2007 Louis Kuijs, World Bank Beijing

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  1. 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

  2. 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

  3. The scale of things

  4. Relaxation of credit standards

  5. Credit worsening in the US sub prime mortgage market

  6. Chain of events Source: Hofman (2007)

  7. Risk is being reassessed Source: JP Morgan Chase and Co

  8. However, so far, spill-over to emerging markets remains low Source: Bloomberg

  9. Possible impact on China • Via direct exposure of China’s financial institutions • Via financial market channels • Economic impact • Simulation results • What about decoupling?

  10. 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

  11. Impact via economic linkages • Economic impact in US (and other countries) • Wealth effects • Repricing of risk • Housing market

  12. The economic impact would affect China’s economy

  13. 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

  14. Financial sector policy implications • Monitoring and reviewing • Structural policies in the financial sector

  15. 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

  16. 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)

  17. 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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