Asian Banks Refrain From TAF, Another Evidence of Decoupling?

``The crisis signals a necessary re-rating of risk. It turns out that it also represents a move towards holding more transparent and liquid assets, as one would expect. This correction is altogether desirable. It has, moreover, been selective. It is a striking feature of what has happened that emerging markets have emerged as a safe haven as investors run away from US households. For those in emerging economies, this must be sweet revenge. They should not cheer too soon. Today's favourites may be brutally discarded tomorrow.”-Martin Wolf, Financial Times, columnist

Yet, despite the contingent actions by key western central banks, Asian Central banks refused to join their counterparts, from the Financial Times (highlight ours),

``Asian central banks on Thursday refrained from joining their North American and European counterparts in taking emergency action to boost market liquidity, underlining what economists dubbed a much healthier funding environment in the region.

``The contrast in responses “absolutely confirms how different the situation is in Asia,” said Glenn Maguire, Asia chief economist at Societe Generale. “There are some funding strains in Australia, Korea and China but nothing significant enough to warrant any change [in the stance of central banks].”

`` “If anything, [Asian] liquidity conditions are excessively high,” said Paul Schulte, chief regional equity strategist at Lehman Brothers. “While the West was trafficking these credit products over the past five years, Asia was, thankfully, in rehab.”

``The Bank of Japan took the lead among Asian central banks in expressing support for the US-led emergency steps to ease liquidity concerns, but said it had no plans at this time to take additional measures of its own. The BoJ has been supplying funds against pooled collateral since last year, allowing borrowers to access funds using a variety of collateral.”

Why is this important? Because it shows of the disparity of the immediate effects of the recent credit triggered turmoil to the region’s economy and financial marketplace. In the decoupling debate, these serve as empirical evidences in support of the pro-decoupling stance.

While we agree that most current account deficit countries (e.g. US Spain Italy Greece et. al) which have supplied the demand side of the equation are likely to suffer from a growth slowdown, if not a recession, and risk a spillover effect throughout the world, where we part is on the probable degree of its impact to Asia and to emerging economies.

Our point is that the structural construct of Asia’s financial market are less reliant on debt or leverage as shown in Figure 2, which makes the region less vulnerable relative to western economies or markets.

Figure 2: IMF: Wide Variety in Terms of Capital Market

In a recent speech by Takatoshi Kato, Deputy Managing Director of the International Monetary Fund (IMF), Mr. Kato notes,

``There is no doubt that the Asia-Pacific region contains countries that vary widely in terms of the level of depth, liquidity, and sophistication of their capital markets. Australia, Singapore, Hong Kong, and Japan already have advanced markets. But what is impressive is capital markets in Korea, Malaysia, China, Indonesia, the Philippines, and Thailand are also developing very rapidly as these countries reap the benefits of institutional capacity building and other structural reforms and international portfolio diversification.” (emphasis ours)

Following Asia’s financial crisis in 1997, the region has learned how to insure itself with a stockpile of forex reserves as well as the attendant reforms in its financial markets.

As we have earlier said, we don’t deny the initial impact of a US led slowdown to the Philippine or Asia’s financial markets as discussed in November 19 to 25 [see A US Recession Will Initially Drag Global Equities Lower], but what we see as potentially divergent is the impact of global monetary policies [see November 19 to 25 Decoupling Debate: How Forward Monetary Policies will Affect Financial Markets?] to individual or importantly to regional financial markets.

The same article from Financial Times underscores the risk that matters most for us (highlight ours)…

`` Despite limited spillover into emerging East Asia from the US subprime turmoil, there are several signs of financial vulnerability related to sharp gains in equity and real estate prices [within the region],” the ADB said.

``Part of that slowdown is likely to stem from China, where “a series of tightening measures has been introduced to curb rapid investment growth and asset-price inflation since mid-2006, but the full effect has yet to be seen,” the ADB said.

``The ADB forecast that Chinese economic growth would slow next year to 10.5 per cent from 11.4 per cent this year. In September, the ADB had forecast that China’s economy would expand 10.8 per cent next year.

`` “The liquidity issue is not really concerning this region,” said Lee Jong-Wha, author of the ADB report. “Inflationary pressure is clearly the main concern, so central banks will become more cautious about that. The issue is monetary instability rather than financial problems.”

Simply put, in contrast to the Armageddon scenario proposed by some, the risks for Asia lies squarely in the hands of China’s reaction to a US-led global slowdown instead of the credit crisis.