Cross-Border Portfolio Investment and Financial Integration in Asia and the Pacific Region
Asia and the Pacific region faced an outflow of portfolio investment during the start of the global financial crisis and a new wave of cross-border portfolio inflows after the cris.
We examine the developments of cross-border portfolio assets and liabilities in Asia and the Pacific region over the period 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 Asian 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 intraregional 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, the Republic of Korea, and other ASEAN economies. Albeit from the low level, the intra-ASEAN integration has been noticeable. Fourth, Japan with the 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, intraregional financial integration has risen at the center of the PRC with growing linkages with Hong Kong, China and Singapore.