Pacific Exchange Blog

Mapping Asia’s Biggest Overseas Investors

December 4, 2017

One of the striking trends in recent economic history is Asia’s growing importance in global investment flows. Over the past two decades, the region emerged as a large net creditor to the rest of the world. The net position, however, does not necessarily tell the entire story. A deeper examination of Asia’s overseas assets reveals the differences in how Asian economies invest abroad.

Digital Currencies May Take off in Japan

November 27, 2017

Not long ago, Japan was at the cutting edge of digital payments. Japanese consumers could make payments by phone as early as 2001, a decade earlier than in the United States. Despite this early lead in payment technology, visitors to Japan today often note the remarkable persistence of cash. In this context, Japanese banks are launching digital currencies, while changes to regulation in China have made Japan a hub for bitcoin trading. These trends could renew Japan’s role as a leader in payments innovation.

Emerging Asia’s Efforts to Deal with Increasing Debt

October 23, 2017

Asian economies have been borrowing more in recent years. Despite concerns that increased external and dollar-denominated debt leave Asia susceptible to destabilizing outflows, other economic and financial metrics depict a region more resilient than when it experienced the Asian Financial Crisis 20 years ago. Prudential policy and regulation have played an important role in improving the region’s financial resilience, though some efforts may run counter to the goal of developing deep local bond markets.

If You Build It, They Will Lend: Why Japan May Fund More Infrastructure than China

October 12, 2017

Demand for infrastructure is growing as developed countries replace deteriorating infrastructure and emerging economies invest in new projects. China has attracted significant attention through its One Belt, One Road initiative and the founding of the Asia Infrastructure Investment Bank, but Japan has recently dominated global project finance. With low borrowing costs and limited domestic credit demand, Japanese banks may be best positioned to lead the financing of a global infrastructure push.

South Korea’s Efforts to Contain Debt and Housing Prices Take Shape

September 29, 2017

Earlier attempts to halt Korea’s dramatic increase in household debt missed the mark but recent regulations have succeeded in limiting credit growth and housing price increases. While household loan quality is performing well the earlier parallel rise in home prices and household debt have left lingering fears that the debt burden will be a drag on economic growth, and that a major fall in home prices could create asset quality issues for the country’s banks.

Tax Increase Forces Financial Services in India to Adjust

September 20, 2017

The Goods and Services Tax (GST) implemented this past June is the largest tax reform in India’s history. By creating a federal taxation system, the GST has major implications for the economy as whole and financial services in particular.

India’s Farm Loan Waiver Crisis

September 11, 2017

India’s annual economic growth exceeds 7% and the country just passed sweeping tax reforms. Despite this progress, it faces a growing crisis over farm lending. Farmers are demanding loan waivers that may cost up to 2.6% of GDP. They’ve captured headlines with their protests, destroying milk and agricultural produce, and taking even more extreme measures. Although India’s agricultural sector is in distress, loan waivers are a costly, temporary solution to complex problems and will likely further strain the country’s public sector banks, already stressed by asset quality problems.

Taiwanese Banks Venture South

July 19, 2017

Banks from Taiwan are expanding across the Asia-Pacific in a search for yield. The initiative has the potential to boost the financial position of Taiwanese banks, but overseas expansion also brings new risks and challenges.

China’s Recent Efforts to Deal with Stressed Loans

June 28, 2017

The pace of stress loan creation in China has slowed recently, partly reflecting efforts to dispose nonperforming loans and to restructure corporate debts. These programs aim at strengthening the banking sector, but will likely weigh on bank earnings and capital levels in the short run.

China’s A-Shares Join the MSCI Index

June 23, 2017

On June 20th, MSCI announced the inclusion of Chinese A-shares to its widely followed emerging markets index. MSCI’s decision to add China, albeit gradually and as a small proportion of the total index, represents a major breakthrough for China’s onshore stock markets.

Large Japanese Capital Flows Pose Risks to the Asia-Pacific

June 2, 2017

Japanese investors have long been known for their overseas investments. Following the 2013 onset of the Bank of Japan’s extraordinary monetary policy, the country’s pace of overseas investments has accelerated even further. While Japanese investors have been buying assets around the world, several Asia-Pacific countries have experienced particularly large capital inflows, exposing them to future changes in Japan’s economy and monetary policy. Among them, Thailand and Australia stand out as having high exposure to Japan.

China Looms Large in Global Green Bonds

May 11, 2017

Green bonds are a creative response to the challenge of financing environmental protection efforts. While the global green bond market has grown at a rapid pace, China has quickly emerged as the largest issuer of green bonds.

Demonetization Is Catalyzing Digital Payments Growth in India

April 12, 2017

Colorful tents of small businesses in Asia

Nearly six months after India’s momentous demonetization, the government continues to expand options for digital payments to reduce the economy’s dependence on cash. While old habits die hard, recent data show that new digital payment methods are building momentum. These innovations offer simple, universal tools that may help India leapfrog older technology to reach a less cash-intensive future.

China’s Growing Presence in Global Bond Indices

March 17, 2017

Despite the size and importance of China’s bond market, the country has had a limited presence in the major global bond indices. This is starting to change as several important bond indices have taken steps to add China following a series of reforms to the country’s domestic bond market.

Can Asia Overcome Challenges and Remain Resilient?

March 2, 2017

Despite sizable capital outflows in recent years, emerging Asia’s strong external position and solid economic performance will help the region weather headwinds and remain financially resilient.

Dim Sum Bonds Take a Dive

February 21, 2017

Image of baskets of dim sum

The development of an offshore bond market, colorfully referred to as dim sum bonds, is an important pillar of China’s strategy to make the renminbi a global currency. However, like other aspects of renminbi internationalization, the growth of the offshore bond market has been halting and uneven.

Auditing the Auditors in Asia

January 6, 2017

Even the best financial regulation can be undone by faulty or inaccurate financial reporting. Accounting regulatory regimes, which include auditor oversight, are critical in ensuring that the plumbing of the financial system works and ultimately the stability of the economy.

Connecting China’s Stock Markets to the World

January 4, 2017

Chinese cityscape in background with bull sculpture in foreground

Over the past several years, several small but important channels have opened to allow capital to flow between China and global capital markets. The newest of these is the Shenzhen-Hong Kong Stock Connect program, which has the potential to serve as important financial gateway for both institutional and individual investors.

Korean Shipping Industry Sinks as Exports Lag

December 21, 2016

photo of ship in stormy seas

Korea’s Hanjin Shipping entered receivership in August 2016 after creditors refused it much-needed support. Hanjin is the most prominent casualty of the recent global shipping downturn. Yet, woes in the industry are not specific to Korea: three Japanese shippers have merged, and Taiwan announced a $1.9 billion bailout for its shipping industry since Hanjin’s episode. Korea and other export-oriented Asian economies will remain vulnerable to persistent shipping weakness as global trade and China’s slowdown persist.

India’s Demonetization: The Long Road to a Cashless Future

December 16, 2016

people lining up in front of bank in india

The chaotic aftermath of India’s recent demonetization shows how crucial cash remains to daily life in developing countries. The disruption also exposed the technological barriers to the transition to a less cash-dependent economy. As the Indian government announces further incentives for cashless payments, the demonetization shock may also jumpstart existing policy efforts to develop a more digital economy.

Chinese Banks are Writing Off More Loans and That is a Good Thing

December 6, 2016

In recent years, Chinese banks have become more aggressive in writing off their nonperforming loans as a way to address their asset quality issues. The acceleration in loan write-offs by Chinese banks was made possible by the relaxation of tax rules and is a step in the right direction for banking reform.

Why Asian Banks are Well Positioned for Basel III

November 23, 2016

A San Francisco Fed review indicates the Asia-Pacific’s 75 major banks are well positioned to meet Basel III minimum standards for implementation in 2019. The strong position of Asian banks can be attributed to the build-up of capital and liquidity buffers after the Asian Financial Crisis of 1997-8, as well as less reliance on leverage and hybrid capital instruments than their western counterparts. The end result is both higher levels and quality of capital.

Can Private Capital Transform Banking in China?

November 4, 2016

China’s banking system has historically been dominated by large government-owned banks. However, several recent trends are challenging that status quo. Private and privatized banks are beginning to play an important role in the financial system with the potential to improve financial inclusion and efficiency while raising new regulatory questions.

Can Fintech Fill Asia’s SME Lending Gap?

October 20, 2016

Colorful tents of small businesses in Asia

Perhaps no sector has more to gain from innovations in financial technology than small- and medium-sized enterprise (SME) finance, especially in Asia. SMEs accounted for 42 percent of Asia’s GDP in 2014 yet received only 18.7 percent of bank lending according to the Asian Development Bank. Fintech can particularly leverage the rapid growth of Asia’s e-commerce and regional trade, trends that complement SME development.

The Growing Importance of China’s Money Market

September 15, 2016

China’s money market is growing rapidly and playing an increasingly important role in the financial system. It serves as both a key channel for monetary policy and as a source of funding for a variety of financial institutions. Recent data reveal that non-bank financial institutions have emerged as the largest borrowers, bringing along new risks to financial stability.

China’s Credit Growth: How Fast is Too Fast?

August 31, 2016

China now has one of the highest leverage ratios among emerging economies, with its corporate debt-to-GDP ratio greater than any other major economy. The debt overhang poses challenges to the country’s economic transition and financial stability, although a full blown banking crisis is unlikely.

Reducing Remittance Fees can Boost Asian Economies

August 24, 2016

image of globe with euro and dollar signs

Remittances exceeded $600 billion worldwide in 2015 with more than two-thirds going to developing countries. Developing Asia receives more remittances than any other region—roughly $200 billion—and in some countries remittances even exceed foreign direct investment inflows. Meanwhile, innovations in payment systems can reduce remittance fees dramatically, increasing the earnings sent back to migrants’ friends and families—and supporting economic growth in Asia.

Implementation of New Impairment Standards: IFRS 9’s Impact on Asia

August 11, 2016

image of financial chart overlaid on financial district of city

Many Asian economies will soon implement IFRS 9. The new standard will fundamentally change how banks determine loan loss allowances. This significant change in methodology will likely require that many banks increase loan loss provisions, resulting in lower reported earnings.

(Re)Classifying Frontier Markets

July 28, 2016

Pakistan’s recent MSCI upgrade highlights one path for frontier financial market development. While stock index categorization may serve to legitimize a market and bestow prestige, it is not necessarily the best indicator for investor sentiment. Global investors consider a broad range of indicators in considering where to deploy their capital. For frontier and emerging markets conducting financial market reform, the challenge is more complex than an index upgrade might imply.

The Bumpy Road towards Renminbi Internationalization

July 13, 2016

A more volatile exchange rate and dampened growth expectations for the Chinese economy have halted, and in some cases led to reversals in, the renminbi’s path towards becoming an international currency.

Japanese Investors Go Abroad with Borrowed Foreign Currency

June 29, 2016

Japanese yen currency and dollar bank note

A half-year into the Bank of Japan’s experiment with negative interest rates, there are growing signs of unusual market activity in Japan, with yields on even long-term government debt going negative and ever-increasing overseas investment. Amid a breakdown in longstanding financial relationships that previously allowed international investors to hedge currency risk cost effectively, Japanese investors are increasingly funding their overseas portfolios with foreign currency debt to minimize foreign exchange risk.

Fixing Taiwan’s Crowded Banking Sector

June 9, 2016

Taiwan has a large number of banks relative to the size of the domestic market, leading to unhealthy types of competition and low levels of profitability. Authorities are trying to solve the problem by promoting bank mergers and international expansion.

China’s Bond Market: Larger, More Open, and Riskier

May 20, 2016

China’s bond market has grown rapidly in recent years and it is becoming more open to foreign investors. At the same time, an increasing number of bond defaults indicate that the bond market is becoming riskier.

How Does China’s Slowdown Impact the United States?

May 9, 2016

Pacific Exchange blog world map sepia with connecting points

How big a concern is China’s slowdown for the U.S. economy? This blog reviews financial and trade linkages between the two countries to explore possible transmission channels. At least for now, the overall direct impact appears to be limited, although U.S. exposure to China is growing.

How Modernizing India’s Payment System can Drive Financial Inclusion

April 26, 2016

India’s heavy reliance on cash has wasted resources and limited financial inclusion, leaving nearly half the population without a bank account. In response to this problem, the government has introduced policies to promote non-cash payments, provide hundreds of millions of new payment-capable accounts to the unbanked, and encourage new technology and innovation throughout the banking sector. The combined effect of these efforts could have a major impact on economic welfare and financial inclusion in the coming years.

The Global Impact of Chinese and Japanese Economic Growth

March 31, 2016

Thirty years ago, Japan was growing so quickly that some predicted it would overtake the United States, while China’s economy was small and closed. Much has changed. China has overtaken Japan as the world’s second largest economy, but as China shifts to a “new normal” of lower growth, observers are increasingly concerned that it may no longer serve as the world’s economic engine. Meanwhile, proactive Japanese economic policy has renewed interest in Japan’s prospects.

Korea’s Shipbuilders and Lenders Navigate an Oil Storm

March 22, 2016

Persistent overcapacity, high inventories, a strong U.S. dollar, and global economic uncertainties have had a substantial impact on oil prices. In response, oil companies have slashed capital expenditures, leading to significant losses at South Korean shipbuilders exposed to oil rig construction. In anticipation of further losses on their shipbuilder exposure, Korean banks have been increasing their loan loss provisions to shore up their allowances and are reporting a considerable impact on earnings.

What’s Behind the Slowdown in Asian Cross-Border Lending?

March 4, 2016

The growth of cross-border lending in Asia has slowed abruptly. Faced with a growing debt burden, Asian borrowers are reducing their exposure to foreign debt. This trend is driven by the appreciation of the dollar versus many Asian currencies.

A Regional Comparison of China’s New Deposit Insurance System

February 24, 2016

With the introduction of deposit insurance in China last year, all the large Asian economies have adopted deposit insurance programs. While China’s deposit insurance shares many similar objectives and design features of other deposit insurance programs in Asia, the specifics of China’s plan differ in many aspects.

The Bank of Japan Goes Negative: What Does That Mean?

February 17, 2016

The Bank of Japan surprised markets last month by implementing a negative interest rate policy as part of its continued fight against deflation. Negative rates turn the traditional rules of finance on their head and may confuse some market participants. Though ordinary borrowers and savers are unlikely to see negative interest rates at this stage, the new regime will impact the Japanese banking system and possibly the country’s international financial linkages.

China’s Shifting Policy Anchors

February 3, 2016

Market participants are anxious to find new policy anchors as China moves towards a “New Normal.” But China’s growth and policy direction are likely to be less predictable in the future, a fact that market participants will have to learn to accept.

What is Asia’s Most Systemically Important Bank?

January 28, 2016

The Financial Stability Board (FSB) recently updated its list of global systemically important banks (G-SIBs), adding China Construction Bank as the seventh Asian G-SIB. Including Standard Chartered, a U.K. incorporated bank with a majority of assets in Asia, more than a quarter of G-SIBs now operate primarily in Asia.

CIPS and the International Role of the Renminbi

January 27, 2016

Globe and currencies

The creation of CIPS is an important milestone on the renminbi’s road to becoming a major global currency. It has the potential to significantly improve the efficiency of cross-border payment transactions and increase liquidity in the offshore market.

Asia is the New Engine of Growth in the Shadow Banking System

December 28, 2015

Monitoring and controlling risks in the shadow banking system is one of the most important tasks facing financial regulators around the world. Asia has recently emerged as the largest source of growth for the global shadow banking system.

Not All NPLs Are Created Equal

December 18, 2015

Credit quality is a key aspect of an institution’s overall soundness. Arguably the most widely used measure for gauging the quality of an institution’s loan portfolio is the reported nonperforming loan (NPL) ratio. However, not all countries use the same definition and therefore NPL ratios are not necessarily comparable across borders.

The ABCs of ASEAN’s Economic and Banking Integration

November 16, 2015

Global team business shake hand silhouettes city with world

In 2007, the ten member countries of the Association of Southeast Asian Nations (ASEAN) adopted the goal to achieve economic integration by creating an ASEAN Economic Community (AEC) by year end 2015. The AEC aims to shift ASEAN from ten fragmented economies to a single market of goods, services, and investment together with freer movement of skilled labor and capital.

After the Fall: The Path Forward for China’s Stock Market and Economy

November 2, 2015

On October 20, 2015 at its Los Angeles branch, the Federal Reserve Bank of San Francisco hosted an Asia Financial Forum entitled After the Fall: The Path Forward for China’s Stock Market and Economy. The event featured Andy Rothman, who spent 20 years in China first as a diplomat and then as an investment strategist.

Banking on China through Currency Swap Agreements

October 23, 2015

Globe and currencies

As China establishes itself as the world’s second largest economy and top trading nation, its currency, the renminbi (RMB), is also gaining popularity around the world. According to the People’s Bank of China’s 2015 Renminbi Internationalization Report, the RMB was the world’s 5th most used payment currency, the 2nd most used trade finance currency, and the 6th most traded currency in 2014.

Capital Flows Go into Reverse in Asia’s Financial Hubs

October 8, 2015

HongKong of modern landmark buildings backgrounds road light

While much of the world has seen a retrenchment in international lending following the financial crisis, Asian banks have dramatically increased their international exposure. Even more striking is that in Asia’s financial centers, Singapore and Hong Kong, the increase in international activity has been accompanied by a change in direction of capital flows. Both economies have now become large net lenders to emerging Asia, a change that reflects larger underlying trends in the region.

Developing Local Currency Bond Markets
 Can Help Insulate Asia from Volatility

October 2, 2015

Many Asian borrowers increased their dollar-denominated debt in recent years amid the extraordinarily low rate environment. Recent volatility has been characterized by capital outflows from Asian economies where such debt accumulated. While emerging Asia remains vulnerable to further capital flight with a majority of external debt in foreign currency, its bond issuances are largely in local currency. Further deepening of bond markets combined with increased local currency debt can insulate emerging Asia from further volatility.

The Speed and Trajectory of Household Debt in South Korea

September 11, 2015

Suburban Seoul Skyline

Similar to many countries in Asia, Korea’s household debt increased considerably after the global financial crisis. As of year-end 2014, household debt as a percentage of GDP was 76% and increased 15 percentage points since 2008. Concerns have risen as the growth rate of household debt has exceeded that of income and the broader economy for a prolonged period.

China Sets the Rules for Internet Finance

August 17, 2015

Internet finance in China is growing rapidly and has the potential to significantly alter the structure of the financial system. New firms, many of which are private, are entering China’s mostly state-controlled financial system and offering innovative products and services.

Why We Shouldn’t Invoke Japan’s “Lost Decade” as China’s Future

August 10, 2015

China’s transition to a new period of slower growth naturally draws comparison to other countries’ historical development. Given its recent experience with rapid credit expansion, build-up in real estate, and stock market volatility, some observers wonder whether China faces a “lost decade” like the one Japan experienced in the 1990s. This comparison is inappropriate, however, and contributes to a misunderstanding of the challenges China does face and a misremembering those Japan encountered a generation earlier.

China’s New Normal Is in the Making

July 27, 2015

“China’s economy has entered a state of new normal – the gear of growth is shifting from high speed to medium-to-high speed,” said Chinese Premier Li Keqiang at the World Economic Forum in Davos earlier this year. Indeed, after two decades of double-digit growth, the Chinese economy is shifting into a lower gear. According to official statistics released earlier this month, the economy expanded at 7 percent in real terms in the second quarter of 2015.

Firing the Fourth Arrow: The Private Sector and the Future of Japan

July 23, 2015

On June 15, 2015, the Federal Reserve Bank of San Francisco hosted an Asia Financial Forum entitled Firing the Fourth Arrow: The Private Sector and the Future of Japan. The event featured a panel of Japan experts, including Michael Chui, Partner, McKinsey Global Institute, Tasuku Kuwabara, Principal, McKinsey & Company, and moderator Sean Creehan, Japan Analyst in the Country Analysis Unit at the Federal Reserve Bank of San Francisco.

Asian Banks Go Global

July 17, 2015

One of the most striking trends following the global financial crisis has been the slowdown and retrenchment of cross-border lending. Due to financial distress, many large global banks, particularly those from Europe, had to reduce their international exposure and pull back funding to their home markets.

Financial Sector Assessment Program: A “Report Card” for Bank Supervision in Asia

July 15, 2015

One of the functions of the Financial Sector Assessment Program (FSAP) is to issue a “report card” for an economy’s compliance with the Basel Core Principles for Effective Banking Supervision (BCP). Since the FSAP’s inception in 1999, many economies have undergone the assessment which is conducted jointly by the World Bank and the International Monetary Fund (IMF).

Asia’s Corporate Debt Poses Risks as Dollar Climbs

June 19, 2015

Companies across emerging markets issued a record $276 billion in U.S. dollar-denominated bonds in 2014 as they took advantage of low U.S. interest rates, and Asian corporates were no exception. Combined with the strengthening dollar, high levels of dollar-denominated debt increase risks to Asian banking asset quality, particularly when borrowers leave foreign exchange risk unhedged. Asia has made substantial progress building financial system resilience and foreign exchange reserves over the past two decades, but external debt still poses risks for many countries including India, Indonesia, and even China.

How Transparent are Asian Sovereign Wealth Funds?

June 19, 2015

Sovereign wealth funds are special-purpose investment funds owned by a national government. Over the past decade, these funds have grown rapidly and now play an important role in the global financial system. This was particularly evident during the global financial crisis, when investment decisions by these funds had a large impact on global financial markets. The newfound prominence of sovereign wealth funds has led to calls for greater transparency and accountability and the establishment of best practice guidelines.

Welcome to Pacific Exchange

June 19, 2015

We are pleased to announce the launch of Pacific Exchange, a new blog from the Federal Reserve Bank of San Francisco focused on financial and banking developments in Asia. Written by the analysts of our Country Analysis Unit, Pacific Exchange will provide timely analysis on the most important trends in the Asia Pacific in a format accessible to a broad audience.