Cross-Border Portfolio Investment and Financial Integration in Asia and the Pacific Region

ARX Administrator    Sayuri Shirai, Eric Alexander Sugandi
01 Jul 2018
Categories: Macroeconomics, General Market Analysis

Country or region: Maldives, Mongolia, Nauru, Nepal, Palau, Papua New Guinea, Samoa, Solomon Islands, India, Indonesia, Malaysia, Myanmar, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, Bhutan, Brunei Darussalam, Cook Islands, North Korea, Vanuatu, Tonga, Tuvalu, Bangladesh, Cambodia, China

This paper examines the developments of cross-border portfolio assets and liabilities in the Asia and Pacific region over the periods of 2001–2017. Rapid increases in both portfolio foreign assets and liabilities have taken place particularly after the 2008–2009 global financial crisis. These cross-border portfolio investments have the following characteristics. First, equity has been a dominant source of foreign liabilities notwithstanding efforts to develop bond markets in the region. One exception is Australia, where foreign liabilities have been largely in the form of debt securities. Limited capital inflows to debt securities issued by emerging Asia may be attributable to the early stages of bond market development. Second, in contrast, debt securities have remained dominant as foreign assets held by the region. This mostly reflects Japan’s preference toward debt securities. Other Asia and Pacific economies have invested more heavily in foreign equity. Third, the region’s assets and liabilities linkages have remained overwhelmingly strengthened against the United States and Europe. Nonetheless, the post-crisis period has witnessed greater financial integration within the region. The intra-regional linkages have been deepest between Hong Kong, China and the People’s Republic of China (PRC), where the former has become a major financier of equity issued by the latter. Singapore increasingly plays a role as an equity investor toward the PRC, Japan, ROK, and other ASEAN economies. Albeit from the low level, the intra-ASEAN integration has been noticeable. Fourth, Japan with largest abundant domestic capital has remained predominantly exposed to the United States and Europe. Within the region, debt securities issued by Australia have increasingly attracted Japan’s capital. To conclude, intra-regional financial integration has risen at the center of the PRC with growing linkages with Hong Kong, China and Singapore.

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The Asia and Pacific region have deepened economic integration through trade and foreign direct investment since the early 1990s. The momentum has emerged since the early 2000s thanks to the participation of the People’s Republic of China (PRC) in the World Trade Organization. The ratio of intra-regional trade has risen from about 55% in 2000 to 65% in 2016, with the latter ratio having become comparable to that of the European Union (EU). Intra-regional FDI has also grown fast from about 10% to 20% over the same period (ADB 2017). 

In contrast, the degree of intra-regional financial market integration within the Asia and Pacific region has remained small. Among Asia and Pacific economies, Hong Kong, China has been a major financier of cross-border capital to the securities issued by the region, followed by Japan, and Singapore. Among these economies, Hong Kong, China has acted as a major equity financier to the PRC. Singapore has been an active equity investor to the PRC, Japan, Republic of Korea (ROK), and other economies in the ASEAN (Association of Southeast Asian Nations). Meanwhile, Japan’s exposure to the region has remained largely in the form of debt securities issued by Australia. Limited capital inflows to debt securities issued by emerging Asia may reflect the early stages of bond market developments (such as lack of liquidity, wide range of maturity, and depth). Japan, Hong Kong, China, and Singapore have major international financial centers. Among them, portfolio-based financial integration has been rapidly growing at the center of the PRC with closer linkages with Hong Kong, China and Singapore.

The global financial crisis of 2008–2009 and the subsequent unconventional monetary easing adopted by advanced economies in the United States, Europe, and Japan have affected the movements of cross-border portfolio capital flows in the Asia and Pacific region. In the initial phase of the crisis, the region faced an outflow of portfolio investment. In the later phase of the crisis (when advanced economies have eased monetary policies) and in the post-crisis period, the region has witnessed a new wave of cross-border portfolio inflows from investors in the United States and Europe in search of higher yields in the region.

This paper explores the characteristics of the movements of cross-board portfolio assets and liabilities in the Asia and Pacific region over the period of 2001–2016—by dividing into the three periods: 2001–2007 (before the global financial crisis), 2008–2009 (during the crisis), and 2010–2016 (after the crisis). In this paper, Asia and Pacific region includes ten economies: Japan; Hong Kong, China; the PRC; the ROK; Indonesia; Malaysia; the Philippines; Singapore; Thailand; and Australia. Of these, ASEAN-5 covers Indonesia, Malaysia, the Philippines, Singapore, and Thailand. This paper also pays attention to Japan; the PRC; Hong Kong, China; Singapore; and Australia due to the presence of large international financial centers. According to the Global Financial Center Index published by Z/Yen (2018) released in March 2018, Hong Kong, China and Singapore are the third and fourth ranked financial centers in the world (following London and New York). Tokyo is ranked the fifth, while the three financial centers in the PRC are ranked as follows: Shanghai (sixth), Beijing (eleventh), and Shenzhen (eighteenth). Australia’s Sydney and Melbourne are ranked ninth and twelfth.

The analysis is mainly based on cross-border portfolio assets and liabilities data from the Coordinated Portfolio Investment Survey (CPIS) compiled by the International Monetary Fund (IMF). The data excludes portfolio assets managed under foreign reserves. The CPIS data are obtained from the holdings of portfolio investment classified by the investor (creditor) country/economy so that the IMF provides derived liabilities data for all countries/economies from the investor information. Caution is necessary as investor country/economy does not necessarily indicate the residency of the investors; rather, it may indicate the country/region of foreign custodians or other intermediaries. Another caution is that data reflect both the effects of price changes (including exchange rates) and investment shifts. 

The paper is organized into five sections. Section 2 offers an overview of the initiatives to develop capital markets in the region launched since the Asian economic crisis of 1997–1998, followed by the current performance of the capital markets. Section 3 first highlights the overall features of cross-border portfolio assets and liabilities in the Asia and Pacific region in the post-crisis period, before discussing the changes of portfolio assets and liabilities prior to, during, and post the crisis. Section 4 discusses features of cross-border portfolio investment assets and liabilities in Asia and the Pacific by differentiating them based on the type instrument. Section 5 concludes. 

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