Asia more exposed than ever to global crisis
Sunday, 27 May 2012 | 00:00
Asia is more exposed than ever to contagion risks, according to investment banking research this week seeking to gauge the fallout of a financial accident in the euro zone.
Among concerns, Asia’s financial sector is now much larger than it was during the 2008 meltdown, according to Nomura, which said this factor could be a possible tipping point if the world’s developed economies fell into recession as a result of the euro-zone turmoil.
“[Asia’s] financial markets have deepened and become more integrated with global financial markets” since 2008, Nomura analysts said, as regional stock markets have grown bigger in terms of capitalization as a percentage of their host economies’ GDP.
As a result, a sharp decline could be more harmful, Nomura said, adding that negative knock-on effects to confidence would erode consumption, as well as investment and bank lending.
In a replay of events that unfolded during the global crisis, outflows of capital from the region would be likely under a European calamity, except that this time, the scale of the flight could be bigger, according to Nomura.
About $764 billion in foreign capital flowed into the region, excluding Japan, in the 11 quarters ending in September 2011, according to Nomura. It said that the inflows include those from funds with significant exposure to the European banking system.
China gets ready
Daiwa Capital Markets said China has likely already prepared an action plan to deal with such a scenario, or even a milder slowdown, although it said the response would be smaller in scale to the massive expansion in bank lending and state-led infrastructure spending blitz orchestrated in 2009.
With China already facing economic slowing, two reductions in Chinese banks’ reserves requirements can now be expected before year-end, Daiwa said.
The central government is also likely to borrow from its 2009 playbook by spending heavily on mega-projects tied to infrastructure to help prop up the economy, it said.
Daiwa said the focus this time around would likely be airport and subway lines, with the financing arranged through state-owned enterprises.
It also said to expect tax cuts aimed at corporations and individuals, in addition to policies aimed at encouraging consumption of services.
Nomura also saw Beijing as preparing contingency plans, but it viewed the response as generally being more aggressive and likely to include cuts to lending and deposits rates, in addition to lowering bank reserve requirements.
“The pace of implementation of a fiscal stimulus would likely be faster than in 2008,” Nomura said.
Source: Market Watch