- International Monetary Fund. Asia and Pacific Dept
- Published Date:
- April 2008
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Note: The main authors of this chapter are Paul Gruenwald, Ranil Salgado, Romuald Semblat, and Olaf Unteroberdoerster. Xiangming Fang provided research assistance.
All figures—as well as tables and charts—in this chapter reflect the revised purchasing power parity weights released by the World Bank in November 2007. Using 2007 as a base year, China now comprises 35 percent of the region’s GDP (formerly 42 percent), Japan 21 percent (16 percent), India 15 percent (17 percent), the NIEs 12 percent (9 percent), ASEAN-5 11 percent (11 percent), and Australia plus New Zealand 4 percent (3 percent).
Three-month percent change of the three-month moving average, calculated at a seasonally adjusted annual rate.
These value measures reportedly reflect in part a sharp rise in Japan’s raw materials import prices late in 2007.
On a year-on-year basis, headline inflation has leveled off in the NIEs at about 4 percent and jumped to 8.7 percent in China in February after having stabilized at 7 percent in late 2007. Year-on-year inflation continues to rise in ASEAN-5 and India (surpassing 6 percent and 5 percent, respectively, in February).
In industrial Asia, the Australian and New Zealand dollars have also appreciated sharply, including reaching two-decade highs against the U.S. dollar in March 2008.
Analysts report that new financing for hedge funds is no longer available from a number of leading international investment banks. Nonetheless, given generally lower leverage ratios, Asian hedge funds may be less affected than those in other regions, as wider spreads also make it easier to meet minimum internal investment hurdle rate requirements with lower leverage.
In part this owes to mark-to-market issues—namely, that banks are more able to place loans in hold-to-maturity pools as default rates have not risen significantly yet. For the same reason, some banks are trying to unwind structured credit portfolios back into loans.
Some Chinese borrowers faced with stricter bank lending standards have reportedly turned their focus to the IPO market as a source of funding.
Estimates from bank analysts and ratings agencies put the exposure of financial institutions in Asia excluding Japan at about ½ percent of aggregate assets, with losses ranging from ½ to 2 percent of aggregate equity.
From January 1, 2008, the deductibility of interest payments on borrowing from parent banks by foreign bank branches has been cut to three times capital from six previously.
For example, four Korean banks, along with one Singaporean bank, have announced plans to access the Malaysian ringgit debt market, with the average deal size expected to be $300–500 million.
See Chapter IV of the October 2007 REO, “The Evolution of Trade in Emerging Asia.”
The impact here applies mainly to nonofficial holdings because these instruments held as official reserves are in many cases not marked-to-market or are held to maturity.
For details on recent financial developments and issues, see the April 2008 GFSR.
As argued in Chapter II, this range may underestimate the impact on the region since there is evidence that spillovers, in particular from the United States to China, have risen in recent years.
Here, the relative weights on real interest rates and the real effective exchange rate in the monetary conditions index equation are assumed to be constant across economies, with the former being three times the latter.
Note: The main authors of this chapter are Roberto Guimarães-Filho, Masahiro Hori, Jacques Miniane, and Papa N’Diaye. Souvik Gupta provided research assistance.
This is the GDP-weighted average of individual countries’ changes in output gaps.
This description is itself a simplification, because China is rapidly moving from the role of a simple assembler to producing its own intermediate inputs. See IMF (2007c) for details on Asia’s evolving intraregional trade.
Here and elsewhere in this chapter, refer to the Appendix for details on the construction of the data and on the empirical methodology.
Note that, as percent of total exports rather than GDP, total exposure to the United States has declined for many countries in the region. While this could mean that Asia has other sources of growth in the face of a U.S. slowdown, in the end this would depend on the covariance of U.S. demand and demand from other parts of the world. This is best investigated using formal econometrics, which is the purpose of the following sections.
These statistics are based on U.S. Treasury International Capital System (TICS) data. We exclude data on Asian residents’ claims on U.S. banks, and U.S. residents’ claims on Asian banks.
The TICS data do not disaggregate between private and official sector claimants within individual countries, but only for the aggregate U.S. position.
This should not be taken as clear evidence that U.S. growth has no impact on Chinese growth. For instance, countercyclical policies in China may have worked to mitigate the correlation.
Note that this is a panel regression, and hence is not a GDP-weighted average.
Alternative IMF staff assessments based on trade elasticities and calibrated multipliers from exports to GDP uncover spillovers in the range of ½–1 percentage points for China and 0.2–0.3 for India.
The covariance appears to be highly statistically significant. However, the standard deviations in Table 2.7 are an incorrect but still indicative approximation of the true distribution of the coefficient, because the dependent variable in the regression is itself an estimate from another regression.
The magnitude of spillover effects from shocks originating in the European Union (not reported in this chapter) are in general much smaller than those from the United States.
Unlike our regressions in the previous section, the VARs cannot be properly estimated in shorter samples because of a lack of degrees of freedom.
The effects of the financial conditions index are not “additive” in the sense that they are not equal to the difference between the impulse responses in the two VARs. As such, the results in Table 2.8 should not be taken to imply that financial linkages are more important than trade linkages.
See IMF (2007a) for a similar approach.
This is the aggregate demand shock with no decline in confidence.
We follow the National Bureau of Economic Research (NBER)’s definition and dating of U.S. recessions. We follow other studies in assessing the impact of a recession by looking at the change in the output gap during the recession (see IMF, 2007a).
See IMF (2007b) among others for more details.
Looking at policy reactions specifically during the 2001 recession has an advantage: the impact of the shock on the region was sufficiently severe that changes in monetary and fiscal policy around this time are likely to have been driven, at least in part, by the external event.
Because the size of automatic stabilizers is relatively small in many countries in the region, changes in fiscal balances were presumably largely reflective of true fiscal stimulus.
Large effects could also arise as a result of nonlinearities (e.g., large U.S. shocks having a disproportionately large spillovers), which may not be captured by our estimation methods.
This is not to suggest that the trade channel will matter more than the financial channel, since countries with high trade exposure tend to have high financial exposure and historically large spillovers as well.
The FCI is included in the VAR as an additional exogenous variable. The second index used for robustness includes the spread between U.S. commercial paper and treasury bill three-month yields. The results were broadly similar.
Given the relative size of the individual Asian country, it is always ordered last in the alternative orderings.
The impulse response functions reported are the generalized impulse response functions proposed by Pesaran and Shin (1998).