The rapid growth in China's domestic investment in recent decades has generated a large appetite for global goods, including from sub-Saharan Africa (SSA). This paper estimates the impact of changes in China's investment growth on SSA's exports. Although rising trading links with China have allowed African countries to diversify their export base across countries, away from advanced economies, they have also led SSA countries to become more susceptible to spillovers from China. Based on panel data analysis, a 1 percentage point increase (decline) in China's domestic investment growth is associated with an average 0.6 percentage point increase (decline) in SSA countries' export growth. This impact is larger for resource-rich countries, especially oil exporters. These effects could be mitigated, however, to the extent that countries can reorient their exports.

Another result of this study is that higher capitalization and lower leverage make banks' equity returns more resilient to adverse economic and sovereign risk shocks. The measure of bank capital matters: the equity to asset ratio has a positive effect on equity returns but the more commonly used Tier-1 capital to risk-weighted assets has an insignificant effect, partly owing to the fact that risk-weighted assets may fail to reflect risks adequately. This finding suggests that while official efforts to increase bank capital are well directed and should be commended, careful thought should be exercised on the choice of the right bank capitalization metric. We also find that the equity returns of banks less reliant on wholesale funding, as approximated by the loan to deposit ratio, tend to outperform after controlling for other variables. Higher reliance on wholesale funding, which is generally short-term, makes banks more vulnerable to funding shortages during periods of extreme market uncertainty. In contrast, deposits tend to be a more stable funding source. Nicht-technische Zusammenfassung AbstractThis study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk and to a lesser extent, by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, better capitalized and less leveraged banks have outperformed their peers, a finding that supports policymakers' efforts to strengthen bank capitalization.JEL Classification: G01, G14, G21

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