By using a unique proprietary dataset and implementing the Wuhan (China) lockdown from January to April 2020 as a natural experiment, we find that individual mutual fund investors in Wuhan significantly reduced their trading frequency, total investment of their portfolios, and risk level of their invested funds during the lockdown period as compared to investors in other cities. These changes are stronger for older investors and are reversed soon after the lifting of the lockdown. Our results suggest that the elimination of face-to-face interaction among individual investors reduced their information sharing, which led to more conservatism in their financial trading. These results are not supported by the alternative explanations of limited investor attention and temporary changes in personal circumstances, including depression and/or income reduction, during the lockdown period. Finally, consistent with the theory of naïve investor trading, we also find that investors received higher trading returns during the lockdown.

Utilizing a national online survey we conducted in China, we examine the impact of COVID-19 on individuals’ willingness to take risks, willingness to trust other people, and mental health measured by the Center for Epidemiological Studies-Depression (CES-D) scale. Our findings suggest that people who live in the neighborhood with a higher number of confirmed cases became more risk-averse, less likely to trust others, and more depressed. Interestingly, the effects on risk preferences and trust attitudes are statistically significant only for men, and the effects on depression are statistically significant only for women. Furthermore, the impact of COVID-19 on financial decisions, such as buying new commercial insurance and making a risky investment, is also statistically significant only for men, which is consistent with our findings on risk preferences. Attitudes towards cadres and doctors mainly drive the results on trust attitudes. The change in employment status does not drive these effects.

The global financial crisis is hitting China hard with great adversity. In response, China start to formulated the plan for dealing with the financial crisis and its possible fallout in June 2008 when China was in the critical stage of putting up the Olympic Games. The Chinese leadership judges the crisis is going to be a serious disaster but not as bad as the great depression of the 1930s. An America-type crisis is unlikely to happen in the country and the main threat would be the Chinese real sector being dragged down under, which in turn sparks a crisis in the financial sector. China’s strategy for combating the crisis therefore is to deal with the immediate crisis effects in the real economy in the first place, and looks for opportunities in the meantime. The overwhelming emphasis is placed on expanding domestic demand to fuel growth. Following this strategy, China has rolled out a comprehensive package of combating measures. The fiscal expansion hit the headlines with extensive government financial support for infrastructure and public service projects. Yet the Chinese monetary stimulus is actually more powerful. The stance of Chinese monetary policy has changed from being precautionary against inflation with flexibility to appropriate easing to promote growth. After several rounds of rate cuts, the Chinese version of quantitative easing takes the central stage. In China’s battle with the financial crisis, the monetary stimulus is playing a leading role at the moment. The international dimensions of China’s monetary policy typify how China turns a crisis into a world of opportunity. China has taken a conservative approach to managing her reserves in which the huge international reserves are taken as self insurance rather than an avenue for international leverage. Within this framework and if safety of these foreign assets can be assured, China can provide finance to countries in crisis through international financial organisations. In addition to the Panda Bonds, the chief way for China to make funding contribution is through IMF. For this matter, China supports the motion to increase the IMF’s lending capacity and would buy the bonds it issues. China is actively calling for reform of international financial architecture. Chinese advisers have publically argued that the increase in China’s funding contribution has to be paralleled by an increase in China’s profile in the power structure in the IMF. In many occasions, China has also acted as spokesman of the emerging and developing economies by making cases for increasing their say in world financial affairs. But on the whole, China has been cautious not to committing herself too much as she knows probably she has little to gain from international policy coordination. Against this backdrop, China has chosen to focus on regional financial cooperation proactively and considerable progress has been made in this area. China’s dealing with the current financial crisis is unassuming. What she has done is down-to-earth common sense. However, the Chinese approach is shown signs of working. Despite the early success of crisis handling, there remain fundamental problems in China’s structure of economic growth. How to redress structural imbalances in the economy, to boost domestic demand, to calm down the property market and, above all, to create millions of jobs, are still the major huge challenges China is facing.

We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes that experience an unprecedented relative growth in mortgage credit from 2002 to 2005. This expansion in mortgage credit to subprime zip codes occurs despite sharply declining relative (and in some cases absolute) income growth in these neighborhoods. In fact, 2002 to 2005 is the only period in the last 18 years when income and mortgage credit growth are negatively correlated. We show that the expansion in mortgage credit to subprime zip codes and its dissociation from income growth is closely correlated with the increase in securitization of subprime mortgages. Finally, we show that all of our key findings hold in markets with very elastic housing supply that have low house price growth during the credit expansion years. Overall, our findings favor a supply-based explanation for credit expansion over income-based or house price expectations-based hypotheses.

A government policy aimed at the reduction of state shares in state-owned enterprises (SOE) triggered a crash in Chinas stock market. The sustained depression and spillover even after the policy adjustments were over constitute a puzzle the so-called state-share paradox. The empirical study finds evidence in two dimensions. First, a regime switching model with an absorbing state suggests that government policy switches the regime to liquidity black holes. Second, there is no evidence of light-to-liquidity during the crash, suggesting to model the crash as an aggregate phenomenon of the whole market. To carefully match the evidence, a theoretical model is set up within the framework of market microstructure. The state-share paradox is not a simply instance of news-driven crash. The model shows that Chinas stock market has distinctive features of liquidity production and price discovery. The irregularities of a representative liquidity supporter generate an inverted-S demand curve and give rise to potential liquidity black holes. Multiple equilibria and the resulting large drop in prices arise from supply dynamics of short-run investors, who buy the stock from the primary market liquidate their long positions in the secondary market. This study contributes a rational panics hypothesis to the literature. The rational panics hypothesis is neither an rational model with noise traders, nor a standard rational expectation model under the asymmetric information framework. It is based on homogeneous agents with incomplete information, and is consistent with the evidence of absorbing regime switching and the recent literature on state-dependent preference. Our findings have larger implications for ine¢ ciency of Chinas stock market.

A government policy aimed at the reduction of state shares in state-owned enterprises (SOE) triggered a crash in the Chinese stock market. The sustained depression and spillover even after the policy adjustments were over constitute a puzzle---the so called "state-share paradox". The empirical study finds evidence in two dimensions. First, a regime switching model with an absorbing state suggests that government policy switches the regime to liquidity black holes. Second, there is no evidence of flight-to-liquidity during the crash, suggesting to model the crash as an aggregate phenomenon of the whole market. To carefully match the evidence, a theoretical model is set up within the framework of market microstructure. The model shows that the Chinese stock market has distinctive features of liquidity production and price discovery. The irregularities generate an inverted-S demand curve, gives rise to potential liquidity black holes, and are key features to explain the state-share paradox. This study contributes a rational panics hypothesis to the literature. The rational panics hypothesis is neither a herding model with or without behavioral assumptions, nor a standard rational expectation model under the asymmetric information framework. It is based on homogeneous agents with incomplete information, and is consistent with the evidence of absorbing regime switching and the recent literature on state-dependent preference. Our findings have larger implications for theoretical modeling and policy design.