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International Monetary Fund. Asia and Pacific Dept
This 2016 Article IV Consultation highlights China’s continued transition to sustainable growth, with progress on many fronts. Growth slowed to 6.9 percent in 2015 and is projected to moderate to 6.6 percent in 2016 owing to slower private investment and weak external demand. The economy is advancing on many dimensions of rebalancing, particularly switching from industry to services and from investment to consumption. But other aspects are lagging, such as strengthening state-owned enterprises and financial governance and containing rapid credit growth. The current account surplus is projected to decline to 2.5 percent of GDP in 2016 as imports increase and the services deficit widens with continued outbound tourism.
International Monetary Fund. Asia and Pacific Dept

moderated somewhat, with total social financing growth of 12.3 percent (y/y) in June. Adjusting for the local government bond swap, total social financing moderated to 16.3 percent (y/y) in June. Headline CPI inflation eased slightly to 1.9 percent (y/y) in June while PPI inflation picked up to -2.6 percent (y/y). 3. Financial markets remain stable after UK voters’ June 23 decision to exit the European Union. After a small loss (1.3 percent) on the first trading day after the decision (June 24), the Shanghai composite index rose by 6.5 percent as of July 21

Tao Sun and Xiaojing Zhang

returns are calculated as changes in log stock market prices, R t =LnP t - LnP t-1 ( Figure 5 ). 6 Figure 5. Daily Equity Returns (January 1, 2007-October 31, 2008) Sources: Bloomberg L.P. and authors’ calculations. Note: LOGSHCOMP, LOGSHFSUB, LOGFXI, LOGHSI, and LOGHSF represent the log difference in Shanghai Composite Index, Shanghai Financial Index, iShares FTSE/Xinhua China 25 index fund, Hang Seng Index, and Hang Seng Financial Index, respectively. Our framework tests whether the subprime financial turmoil has had any significant effect on daily

Mr. Serkan Arslanalp, Wei Liao, Shi Piao, and Miss Dulani Seneviratne

Annex 1. Event Study: Exceptionally Large Movements In Chinese Markets To identify shocks originating from China, we look for exceptionally large changes in the Chinese stock market and the exchange rate related to domestic news and unrelated to global events. Specifically, for the Chinese stock market, an exceptionally large movement is defined as a daily change in the Shanghai Composite Index by more than 5 percentage points. To make sure these are unrelated to global events, this definition excludes days during the global financial crisis

Xiaojing Zhang and Tao Sun
This paper focuses on evidence from stock markets as it investigates the spillovers from the United States to mainland China and Hong Kong SAR during the subprime crisis. Using both univariate and multivariate GARCH models, this paper finds that China's stock market is not immune to the financial crisis, as evidenced by the price and volatility spillovers from the United States. In addition, HK's equity returns have exhibited more significant price and volatility spillovers from the United States than China's returns, and past volatility shocks in the United States have a more persistent effect on future volatility in HK than in China, reflecting HK's role as an international financial center. Moreover, the impact of the volatility from the United States on China's stock markets has been more persistent than that from HK, due mainly to the United States as the origin of the subprime crisis. Finally, as expected, the conditional correlation between China and HK has outweighed their conditional correlations with the United States, echoing increasing financial integration between China and HK.
International Monetary Fund. Asia and Pacific Dept

temporarily suspended. Following these actions, stocks stabilized and rebounded starting on July 9, with declining intraday volatility. Shanghai Composite Index 1/ (Dec 19, 1990=100) Source: Bloomberg. 1/ Black line shows daily high and low of the index. Blue line referes to daily closing price. 3. Even though the market correction was sizable and fast, the economic and macro-financial consequences are likely to be manageable given the available buffers . Wealth effects from past equity price changes in China were small, with only a small portion of

Mr. Serkan Arslanalp, Wei Liao, Shi Piao, and Miss Dulani Seneviratne
This paper finds that financial spillovers from China to regional markets are on the rise. The main transmission channel appears to be trade linkages, although direct financial linkages are playing an increasing role. Without an impact on global risk premiums, China’s influence on regional markets is not yet to the level of the United States, but comparable to that of Japan. If China-related shocks are coupled with a rise in global risk premiums, as in August 2015 and January 2016, spillovers to the region could be significantly larger. Over the medium term, China’s financial spillovers could rise further with tighter financial linkages with the region, including through the ongoing internationalization of the renminbi and China’s capital account liberalization.
Miss Nkunde Mwase, Mr. Papa M N'Diaye, Ms. Hiroko Oura, Mr. Franto Ricka, Katsiaryna Svirydzenka, and Ms. Yuanyan S Zhang

news about growth prospects) or pure financial shocks (such as news about a change in the exchange rate regime), or a mixture of both. An exceptionally large movement is defined as a daily change in the Shanghai Composite Index by more than 5 percentage points. To make sure these are unrelated to global events, this definition excludes days when the U.S. stock market moves by more than one standard deviation just hours before the Chinese market opens (as a proxy for global events). Similarly, for the Chinese exchange rate, an exceptionally large movement is defined

International Monetary Fund. Asia and Pacific Dept

margin financing, the Shanghai Composite Index recovered from its undervalued level of about 2000 and eventually registered an increase of about 150 percent from its level in July 2014. The subsequent warranted correction, however, is complicated by the acceleration of the unwinding process. As such, my authorities implemented a series of conventional and unconventional measures—which are in line with international practices while taking into account country-specific circumstances—to restore market confidence, prevent a disorderly unwinding of margin financing, and

Mr. Lamin Y Leigh and Richard Podpiera
The recent wave of foreign investment in China's banks and the prospects of further opening of the banking sector under the WTO agreement suggest that foreign banks are likely to play an increasingly important role in China. This paper takes stock of the involvement of foreign banks in the Chinese banking sector in the perspective of international experience. While in most other countries foreign bank entry took the form of direct takeover or majority shareholding, foreign investments in China's banks have been minority shareholdings with very limited management involvement. The paper concludes that China appears to be well positioned to benefit from further opening of the banking sector to foreign investors. International experience suggests that greater competition from and participation of foreign banks can in general bring important benefits if appropriate incentives and sufficient opportunities are created.