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Trading Restriction as a Channel of Financial Contagion—Evidence from China’s Stock Market

Laura Xiaolei Liu, Jiajie Xu, Ninghua Zhong, Oct 18, 2017

China’s stock market imposes various trading restrictions such as daily price limits and trading suspension rules, which are intended to stabilize the market during turmoil. During China’s stock market crash in the summer of 2015, these trading restrictions made many highly valued stocks non-tradable and consequently caused mutual funds facing redemption pressure or with precautious concerns to sell other tradable stocks, exacerbating their price drops.

Selective Default by Local Governments in China

Haoyu Gao, Hong Ru, Dragon Yongjun Tang, Jan 10, 2018

We identify bank loans to China’s local government financing vehicles and find that 1.7% of the loans that matured during the sample period failed to make the due payments. The LGFV loan default rate is much higher for commercial banks than for the China Development Bank, which provides more comprehensive financing for local governments than typical commercial banks. This selective default pattern is weaker during the ¥4-trillion stimulus period but stronger after 2010 when commercial banks exited the LGFV market.

Bilateral Trade and Shocks in Political Relations: Evidence from China

Yingxin Du, Jiandong Ju, Carlos D. Ramirez, Xi Yao, Mar 14, 2018

To what extent do political relations between countries affect their economic exchange? Using evidence of China’s relations with other major powers during the period of 1990 to 2013, Yingxin Du, Jiandong Ju, Carlos D. Ramirez, and Xi Yao point out the time-aggregation bias in the existing empirical research and provide insights on the relationship between political shocks and trade.

The Two-Pillar Policy for the RMB from December 2015 to May 2017

Urban J. Jermann, Bin Wei, Vivian Zhanwei Yue, Aug 16, 2017

We document that since December 2015 the People’s Bank of China (PBC) has followed a “two-pillar” exchange rate policy that aims to achieve both stability and flexibility. Based on a no-arbitrage model and options price data we estimate the credibility of the policy as well as its impact on the RMB/USD exchange rate. The model was able to correctly forecast the end of the two-pillar policy in May 2017.

Measuring Chinese Shadow Banking: Banks’ Shadow and Traditional Shadow Banking

Guofeng Sun, Feb 07, 2018

Shadow banking in China includes an important role for Banks’ Shadow in the credit money creation process, which poses challenges to monetary policy regulation and financial risk management. I urge regulators to closely track the evolution of various shadow banking channels both on- and off-balance sheet. To strengthen supervision, separate macro-prudential regulation tools, such as asset reserves and risk reserves, are needed for Banks’ Shadow and Traditional Shadow Banking, respectively.