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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

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.
Xiaojing Zhang and Tao Sun

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

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. Ranil M Salgado

recent phenomenon? A historical event study provides a more systematic way to help answer this question. We identify 30 episodes during which China experienced outsized stock market movements, defined as a change in the Shanghai Composite Index by more than 5 percent. To make sure these were unrelated to global events, we exclude the days when the U.S. stock market moved by more than one standard deviation just before the Chinese market opened. We also conduct historical news searches to ensure China-specific events happened during the identified days (see Annex 2

Mr. Serkan Arslanalp, Wei Liao, and Shi Piao
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.
Mr. Serkan Arslanalp, Wei Liao, and Shi Piao

change in the Shanghai Composite Index by more than 5 percent. To make sure these were unrelated to global events, we exclude the days when the U.S. stock market moved by more than one standard deviation just before the Chinese market opened. We also conduct historical news searches to identify China-specific events happening during the identified days (see Annex 1 for more details). Based on this sample, we find that the average impact of China-related shocks on regional stock markets rose after the global financial crisis and further after June 2015 ( Figure 11

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. Udaibir S Das, Jonathan Fiechter, and Tao Sun

-share market . Over the past 10 years, the average price-earnings ratio of A-share markets has dropped from 50–60 to 11. As of end-September 2012, the price-earnings ratio of the Shanghai Composite Index stood at 11.25, while the S&P 500 Index, DAX, and Nikkei 225 Index had ratios of 14.67, 13.84, and 21.80, respectively. Compared with other markets around the world, and taking into account the long-term growth rate of China, the current valuation of A-share markets remains quite low. In fact, its valuation has already hit a historical low, not only far below its peak in