Evaluating the Financial Risks in China

Despite its size, direct global exposure to the Chinese financial system is currently still small. A regulatory wall around the Chinese financial system is largely responsible for this.

A financial crisis in China is likely to lead to a heighten level of capital flight. The Chinese authorities and central bank would be forced to offset downward pressure on the yuan–dollar exchange rate buy selling U.S. denominated assets (i.e., primarily U.S. Treasuries). This, however, is unlikely to result in a significant fall in U.S. bond prices (i.e., a rise in U.S. interest rates) given the dollar’s solid safe-haven status in times of global financial crises.

Most of the fallout will be within Asia, where trading and lending have the strongest links and where credit has been growing the fastest globally since the 2008–2009 financial crisis.

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