Department Chair

Theodore F. Byrley, Ph.D., Chair and Associate Professor of Economics and Finance

Date of Award

5-2013

Access Control

Campus-Only Access

Degree Name

Applied Economics, M.A.

Department

Economics and Finance Department

Advisor

Theodore F. Byrley, Ph.D., Chair and Associate Professor of Economics and Finance

Department Home page

http://economics.buffalostate.edu/

First Reader

Xingwang Qian, Ph.D., Assistant Professor of Economics and Finance

Second Reader

Frederick G. Floss, Ph.D., Professor of Economics and Finance

Abstract

When the second largest American subprime loan institution, the New Century Financial Corporation, went bankrupt, the subprime crisis emerged. In only a short period of one year, the subprime crisis completely took the industrial mortgage industry to the brink of bankruptcy and beyond. Many related institutions’ hedge funds were forced into liquidation and investment banks announced that their losses had swelled. Moreover, commercial banks and insurance institutions also suffered great losses. The global stock market declined in response. The credit risk created by the subprime crisis eventually evolved into a global financial crisis.

As a principal part of the world economy, what can China learn from the US experience when facing rapid growth in the real-estate market? In addition, how does China avoid the similar emergence of a credit crisis at home? This thesis will try to give some advice by analyzing the reasons for the US crisis and the impact of the crisis on China.

This paper includes four parts: The first part explains what the subprime crisis is and how the crisis affected the Chinese real-estate market. From Hong Kong and Shanghai Banking Corporation (HSBC) recognizing 10.5 billion dollars in bad debts, to Fannie Mae and Freddie Mac falling into deficit, to the bankruptcy of the Lehman Brothers, the subprime crisis caused large losses for a large number of financial institutions which resulted in a systematic to stock shock to the economy. The effect of the crisis on the Chinese real-estate market can be divided into four stages during the timeline.

The second part analyzes the causes of the subprime crisis. People with limited income and little or no personal credit history were able to acquire mortgage loans. They were unable to repay the loans by selling their houses once the housing prices decreased. Other reasons for subprime crisis are the existence of subprime market, the real-estate asset bubble, the weaknesses of credit assessment, the misguided federal government policy, and the ineffective regulatory monitoring.

The third part expounds on the impacts on the Chinese real-estate market caused by the subprime crisis. Falling housing prices all over the country not only affect the sale of houses, but also affect the confidence of house buyers. At the same time, the subprime mortgage crisis in the US serves as a case study for the Chinese of what to do and not to do in China. As a result of the impact of the subprime crisis, Chinese commercial banks have changed their operations and strengthened their risk control mechanisms.

The last part gives some suggestions for policies and the banking system to reduce the impact of the subprime mortgage crisis on China.

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