For emerging markets, credit spreads have increased somewhat, but the impact of the turbulence on these markets seems so far to be moderate. Equity markets have also seen a turnaround and in a number of countries have now regained lost ground. 4  BIS Review 115/2007  The market for asset-backed commercial paper has been severely affected. The volume of paper outstanding has fallen markedly, and the share of short-maturity paper has increased. This is in part due to the withdrawal of a number of money market funds from this market. Substantial losses in this type of fund would have resulted in customer flight and funds are therefore having to dispose of their investments in markets that are now considered uncertain. The current turbulence differs from previous periods of turbulence. The impact on equity markets and emerging economies has been limited. This time, we are dealing with a credit and liquidity squeeze at the core of the financial system. This affects many participants, including large banks. Subprime mortgages account for more than 6 per cent of the total volume of mortgages in the US. However, the problems in this segment are spreading to other housing market segments. The housing supply increases because of the rise in the number of foreclosures, and housing demand declines as it becomes more difficult for new borrowers to obtain a mortgage. This may lead to a further decline in house prices. The resulting wealth effects may have a dampening impact on household consumption.
The greater use of RMB in international transactions will be closely related to China’s financial reforms and liberalisation, with new fund flow channels being opened up in RMB. For example, the RMB QFII scheme allows offshore institutions to use RMB funds to invest in Chinese capital markets, and it is a new channel in addition to the US dollar-based QFII scheme. And further to a recent relaxation, outflows under the QDII scheme can also be made in RMB. Such developments, in turn, will bolster the use of the RMB in trade, foreign direct investment and international transactions, thereby supporting the further development of the offshore RMB market. 13. While recent developments in RMB have been exciting, given the possible scope of future expansion, we are probably still only at the early stage of what could be more significant changes in the years to come. After all, RMB deposits and bonds outstanding in the offshore market only account for about one percent of onshore deposits and outstanding debt respectively. The possibility for expansion remains substantial. 14. One of the aims of the Hong Kong-London Forum is to assess what all this means to the financial institutions and to corporates — many of whose representatives are gathered here today. 15. For corporates, especially those already having business links with China, it is important to get prepared for the increasing use of RMB as a currency for transaction, financing and investments.