Asian Banking: China and Asian Banks Fill Void Left by European banks

Nature abhors a vacuum.

In Asia, the Bank of International Settlements recently remarked that China and Asian banks filled the void left by retrenching European banks

The Central Banks News notes…

A pullback by Swiss and euro area banks from Asia-Pacific has been countered by an expansion of local banks, including Chinese and offshore centers, resulting in a continuous rise in international credit to the booming region, the Bank of International Settlements (BIS) said.

Fears of a lack of funding in Asia-Pacific due to the retrenchment of European banks after the global financial crises and the euro area’s debt crises thus never materialized….

The statistics…

Foreign lending to Asia Pacific rocketed by 41 percent, or $613 billion to total outstanding claims of $2.1 trillion by mid-June 2012 from mid-2008, just before the collapse of Lehman Brothers, BIS said in its December quarterly review.

This expansion is in stark contrast to a drop in international lending to emerging Europe of 14 percent, or $230 billion, and a more modest increase in lending to Latin America of 24 percent, or $254 billion, in the same period.

In Asia Pacific, the total claims of euro area banks shrank by an estimated 30 percent, or around $120 billion, between mid-2008 and mid-2012 and their share of foreign lending fell from 27 percent  to 13 percent by mid-2012, BIS said.

More stats…

Drawing on other sources, such as Bankscope, BIS found that the unconsolidated total assets of Chinese banks’ foreign offices in Asia (excluding Singapore) grew by $135 billion, or 74 percent, from 2007 to 2011.

And based on data from Dealogic, BIS learned that Asian banks, including those from Hong Kong and Singapore, increased their syndicated loans to emerging Asia Pacific by 80 percent, or $223 billion, from 2007 to 2001. Asian banks' share of total signings rose to 64 percent from 53 percent.

Insights to draw from the above.

Unlike mainstream thinking, Chinese and Asian banks’ picking up of where European banks vacated signifies as spontaneous market action at work. This has essentially dissipated “fears” over the lack of funding. Again, nature abhors a vacuum.

The withdrawal of European banks in Asia may perhaps be read as “home bias”. Due to the ongoing crisis, European banks may have taken a defensive posture or may have reconfigured their corporate strategies to optimize on their competitive advantages on the domestic arena or has been made to raise capital by reducing expenses and by taking lesser external risks.

Yet such void presented an economic opportunity for Chinese and Asian banks. The report does not indicate that the actions of Asian banks have been under the directives of respective governments.

Also, the increasing role of China’s banks in providing financial intermediation to Asia has been consistent with her government’s push to promote the yuan as an international reserve currency. Deepening trade and financial relations and exposures will help promote regional currency based transactions.

On the other hand, this again reveals of the paradox between China’s militant regional (territorial claims) policy and economic and financial relations with the region—another instance of Dr Jekyll and Mr. Hyde relationship.

Importantly, this report shows of the deepening trend of financial integration in the region. The implication is that regional markets will be more correlated and more intertwined which should optimize the region’s economies of scales and hasten the financial and economic development

Alternatively, greater interconnectivity and interdependence infers to greater contagion risks.

JETRO: Rapid Globalization To Spur Emerging Asia’s Outperformance

In the latest monthly outlook “Japan Looks for Economic Growth in Emerging Asia” by Japan External Trade Organization (JETRO), a Japan government owned trade organization, JETRO cites Emerging Asia’s economic prospects as very promising. (hat tip: Keith Rabin of KWR International)

The reason: (bold emphasis mine)

The dynamics of the global economy are changing. During the past century, global economic growth was primarily driven by activity in the “the three locomotives,” the US, EU and Japan.

Rapid globalization, however, is leading to new innovations, such as the proliferation of highspeed telecommunications and enhanced logistical infrastructure. This is resulting in a more connected, multi-faceted world. Economically, these changes allow companies to coordinate over long distances to optimize their supply chains and reduce their cost structure by moving production to developing economies. Building from a lower income baseline, stronger growth is helping to raise living standards and turn these developing economies into markets in their own right. As a result, they are now becoming the primary incremental drivers of global consumption and production.

And Emerging Asia's thrust towards deeper globalization have been anchored on manifold Free Trade Agreements (FTA) which would not only integrate Asia but foster more free trade with the world.

Integrating Asia: Japan-India Trade Pact

More signs that Asia continues to deepen her trade ties with each other.

This from the Japan Times

Prime Minister Naoto Kan and visiting Indian leader Manmohan Singh officially agreed Monday in Tokyo to activate an economic partnership agreement as soon as possible and to speed up talks on civilian nuclear cooperation.

The deal to strengthen economic ties between Japan and India, a fast-growing democratic nation with a population of 1.2 billion, comes at a time when Asian nations are becoming increasingly concerned about China's activities in the East China and South China seas….

The two countries will continue working-level preparations for signing the EPA. Tokyo aims to sign it around the end of the year so it can be submitted to the Diet early next year for ratification, Japanese officials said.

Under the EPA, the two countries will abolish a wide range of tariffs on products ranging from car components and electronic goods to bonsai plants. Broader than a free-trade agreement, the EPA is a more comprehensive pact on economic and trade cooperation that also includes promoting investments.

"This is a historic achievement that signals the economic alignment of two of the largest economies in Asia," Singh said. "It will open up new business opportunities and lead to a quantum increase in trade and investment flows between our two countries."

Japan and India began discussing the possibility of a civilian nuclear energy deal in June that would allow Tokyo to export its nuclear power technology to New Delhi. But India is not a signatory member of the Nuclear Non-Proliferation Treaty, and it is unclear how soon the two nations can conclude a deal, given the strong antinuclear sentiment here…

The EPA will eliminate tariffs on 94 percent of two-way trade in 10 years after the pact takes effect. The tariffs to be abolished include those on Indian exports of car components, DVD players, video cameras, peaches and strawberries to Japan, while Japan would improve access to most industrial products, as well as durian, curry, tea leaves and shrimp.

If there is anything to be bullish about, it is that the direction of geopolitics seems headed towards embracing broader ‘free’ trade.