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HIGHLIGHTS

• Emerging Asian activity and markets continue to be driven largely by developments outside the region, most notably the EU debt crisis.

• Investment growth is fading fast with all PMI-reporting countries save India now having readings below the threshold level of 50. China is the latest ‘casualty’, posting a reading of 49.0 in November. Trade growth continues to decline as well although recent export growth up-ticks in the bellwether economies of Korea and Taiwan should be monitored.

• After holding their fire for several months, AXJ central banks are starting to loosen conditions. China annouced a 50bps cut in banks’ required reserve ratios and the Bank of Thailand lowered its policy rate by 25bps, in part due to domestic conditions. The bias nearly everywhere is to ease.

• Markets remain choppy and very much driven by news and data flow. Most bourses were down in November and AXJ currencies weakened.

BIS DATA AND ASIAN BANK LINKS TO EUROPE: KNOWNS AND UNKNOWNS

With the sovereign and banking crisis in Europe deepening by the day, the focus on contagion paths to Emerging Asia (and elsewhere) has intensified. One key financial channel is the linkages between European banks and Emerging Asian banks. At issue is what could happen to Asia if European banks were forced to
abruptly shrink their balance sheets.

The main data source for getting at this question is the quarterly review of the Bank for International Settlements (BIS).1 This document provides the claims of BIS reporting banks on other banks globally. A number of commentators have cited these data as evidence when assessing Asian bank vulnerabilities.
In this “View” we ask the following: (i) What do we know; (ii) What do we not know; and (iii) What can we infer about Asian bank vulnerabilities?

  • Known. BIS data show the claims of BIS reporting banks (by nationality) on banks elsewhere (by nationality, including in Emerging Asia).
  • Known. BIS data also show the claims of non-BIS reporting banks on BIS banks, so one can generate the chart below (courtesy of my colleague, Aninda Mitra).