Reseach Paper: The Financial Integration of China and India

In light of the recent stock market falls and discussion of the role of Chinese banks in fueling stock market speculation I am posting details of an excellent paper by Philip Lane and Sergio Schmukler on the International Financial Integration of China and India.

This is an academic paper but given the ability of the Chinese stock market to cause a ripple effect across the globe it represents propitious timing.

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"The International Financial Integration of China and India"
World Bank Policy Research Working Paper No. 4132


Contact: PHILIP R. LANE
University of Dublin, Centre for Economic Policy
Research (CEPR)
Auth-Page: http://ssrn.com/author=605905

Co-Author: SERGIO L. SCHMUKLER
World Bank - Development Research Group (DECRG)
Email: sschmukler@worldbank.org
Auth-Page: http://ssrn.com/author=50352

Full Text: http://ssrn.com/abstract=961758

ABSTRACT: Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China's foreign direct investment liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both areshort equity, long debt. Third, China and India have improved their net external positions over the past decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies, domestic financial sector policies, and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset and liability holdings) and, consequently, the international financial system.