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East Asia & Pacific is facing some great development challenges today: urbanization, protection of the environment, the need to find renewable energy sources and many others. This site wants to create a conversation around those important issues. More »

sub-prime

Will Asian investors rescue the U.S. mortgage giants?

Submitted by James Seward on Thu, 2008-08-21 21:32

The short answer appears to be no, but let’s start at the beginning…as anyone who has been following the financial markets now knows, the mortgage market in the U.S. is in serious disarray and the prospects for recovery are not positive.  Some observers are calling it the worst housing crisis since the Great Depression of the 1930s.  Housing prices have been in a freefall over the past year, set off by the losses in the sub-prime mortgage market.  House prices have dropped by over 14% on average and substantially more in many major metropolitan areas, and delinquency rates are on the rise across the board – all of the key indicators (pdf) are flashing red. 

Is there a wave of bad debt on the horizon in Asia?

Submitted by James Seward on Tue, 2008-08-05 22:35

You may want to grab your surfboard to be prepared even though this wave may not yet be visible now.  There is little (public) focus on this question in Asia at the moment and I suspect that the reason is simple – over the past ten years we have witnessed a relatively long period of stability and rapid economic growth across Asia.  Such a situation can too easily breed complacency and high levels of risk-taking by banks, as well as a more relaxed stance by the regulatory authorities. 

We have already seen this scenario play out in the United States and the current financial crisis is still unfolding at a rapid pace with a very uncertain outcome.  The recent massive debt write-downs by major investment and commercial banks have shown that the losses initially created by sub-prime mortgage crisis are continuing to grow with the IMF predicting aggregate losses of upwards of $1 trillion.  Some observers are even predicting that this financial crisis will be the worst since the Great Depression. 

Will the current financial turmoil change the financial architecture in Asia?

Submitted by James Seward on Mon, 2008-06-30 18:23

It has been a long time since I’ve written, but the past two months have been quite hectic for us!  I just returned from China, where we were working with the capital market supervisor, and the issue of the financial sector regulatory architecture, or how market supervisors should be organized, was a topic of discussion.  In early June, there was a conference with all of the key financial supervisors on the topic of integrated regulation and supervision, and again, the policy makers are keenly focused on this issue now.

Across Asia, this topic has largely been in the background since the years immediately following the Asian crisis in 1997-1998.  However, the sub-prime mortgage crisis in the United States, beginning in the summer of 2007, has once again brought this issue to the forefront of policy discussions among Asian financial supervisors, particularly those in the developing economies.  Given the global turmoil and the new domestic challenges in emerging Asia (i.e., high inflation, rapid credit growth, and equity market turbulence, etc.), effective supervision of financial institutions and markets is clearly a hot topic.

This most recent financial crisis unfolded rapidly, impacted the largest and most sophisticated financial institutions in the world, and the duration and ultimate ramifications of the crisis is still unknown.  In Asia, the direct exposures of financial institutions to sub-prime-related instruments and risks appear to have been limited as most institutions were not active in this market segment.  In addition, the financial markets in Asia have not witnessed the same level of financial innovation as in the US and Europe with a more limited range of complex structured products. 

China’s economic slowdown—what to do?

Submitted by Louis Kuijs on Thu, 2008-06-19 14:06

The World Bank released the China Quarterly Update —of which I’m the lead author, full disclosure here-- today at a press launch in our Beijing office. The economic journalists noticed that the Bank’s projection for GDP growth in 2008 is now 9.8 percent, more than 2 percentage points lower than the outcome in 2007. Several journalists asked whether it is not time to stimulate growth by loosening macro economic policies and/or what would be the most appropriate policies to relax.

Somebody living in Dallas or Dusseldorf may find it difficult to understand why a government would want to stimulate the economy when growth falls to 9.8 percent.

The difference in perspective is related to a question that has been raised many times since the sub-prime problems broke out in the US: What will happen to growth in developing countries and emerging markets when the US economy, and the European one as well, slows down considerably? Many developing countries and emerging markets had been growing rapidly in the years preceding the sub-prime problems—much more rapidly than high income countries. But exports to high income countries are important for most of them. So the question was: can developing countries and emerging markets “decouple” from the high income countries?

The answer given by many economists was (as usual) yes and no. Developing countries and emerging markets that, like China, have successfully integrated into the world economy cannot decouple from the global economic cycle because a weaker world economy means lower exports and investment. 

Will East Asia suffer the US slowdown?

Submitted by Alessandro Magn... on Wed, 2008-02-27 12:50

In the past few years, the world economy has done very well. Almost every nation has grown richer. In the last six months, however, bad news has been pouring in.
 

Optimism about China's growth

Submitted by Louis Kuijs on Fri, 2008-02-22 11:26

As you may have heard, our new World Bank Chief Economist is Chinese, so it was with interest that I watched a short interview of him on Bloomberg about China's economy: 

 

 

 

 

One key point that I picked up is that he also remains optimistic about China's growth prospects in 2008. He answered a question about China after the Olympics, but in his answer he expressed the confidence in China's domestic economy more generally. World growth prospects have come down as the economies of the US and Europe are starting to feel the impact of the financial turmoil triggered by the sub prime problems in the US.

This will have an impact on China's exports and investment in the tradable sector. However, as Justin mentioned, China's domestic economy has pretty robust growth momentum at the moment and this will help support China's overall growth. And, given China's increasing weight in the world economy, this in turn should also help the world economy.

Is China de-linking from the U.S. economy?

Submitted by David Dollar on Wed, 2008-02-20 11:17

The year 2007 was an important milestone in modern economic history.  While the U.S. grew well, China contributed more to global GDP growth than the U.S. did.  That pattern is likely to continue for the foreseeable future.  Roughly speaking, the U.S. economy is about four times the size of China’s.  If the U.S. grows at 2% -- which is solid for an advanced economy – and China continues to grow at 10+%, then China will be adding more to global GDP each year than any other country.  The same can be said for global trade: China’s imports have risen 28% in the past year, so that it is an increasingly important source of demand for other countries. 

The growing importance of China in the global economy is the main reason that we have launched this China Development Blog.  There is huge interest in the prospects for China and in what is actually happening on the ground here. 

While China has emerged as an economy of nearly equal importance to that of the U.S., it is also important to note that China and the U.S. are closely intertwined.  There is broad agreement that the U.S. economy is slowing down in the wake of the sub-prime financial mess.  Views on whether the U.S. goes into recession are about 50:50; but what is clear is that there will be a significant slowdown in U.S. growth.  How much effect will this have on the global economy?  How much on China?  One school of thought has it that China and the rest of East Asia are increasingly “de-linked” from the U.S. cycle, hence they will feel little impact.