The current global financial crisis: Do Asian stock markets show contagion or interdependence effects?

In the framework of the current global economic crisis, a pertinent question is whether the world economies are suffering from contagion or interdependence effects. With its origins in the US sub-prime mortgage market crisis starting at the end of 2007, when a loss of confidence by investors in the value of securitized mortgages resulted in a liquidity crisis, hard-hitting the banking system and rapidly spreading into the financial markets, the effects of the crisis were automatically reflected in the rest of the world economies. These effects become more severe as the rest of the world is facing economic and financial instability. Therefore, the American shock can be seen as the trigger that revealed the other economies’ own financial problems. The main finding of this paper shows that the US stock markets are not generating contagious effects into the Asian stock markets. However, strong evidence of volatility transmission derived from these economies’ interlinkages has been detected.     

From financial repression to financial crisis? The case of China

This study explores the connections between financial repression policies and the possibility of financial crisis, a relationship that has been overlooked in previous literature. We focus on China, a country with one of the highest levels of financial repression in the world. China's case shows that when financial repression is maintained at a modest level, as the government did before 2008, the possibility of a financial crisis is low; however, when financial repression policies are pushed to an excessive level, as the government did after 2008, the national asset‐liability structure may be damaged to such an extent that a financial crisis becomes likely. The key to understanding the changing role of China's financial repression policies lies in the survival strategy of the Chinese party‐state, which regards finance as a powerful weapon and is eager to use it to address certain economic, political, or social problems that may endanger its rule.     

What happened to the world's potential growth after the 2008–2009 global financial crisis?

This paper provides estimates of potential growth for 52 economies in 2000–2018. We follow Borio et al.’s (2014, 2017) methodology, which takes into account the relationship between financial factors and the output gap. We find that the world's potential growth declined from an average of 3.0% in 2000–2007 to 2.6% in 2010–2018. Potential growth peaked before the crisis at 3.4% in 2006. The trough was in 2009 at 2.3%. Potential growth started recovering in 2010 and reached 2.9% in 2018. Decomposing the 0.4 percentage points decline between 2000–2007 and 2010–2018 by economy, we find that high-income Europe contributed 0.34 percentage points. The decline in potential growth in the United States contributed 0.24 percentage points, while the decline in Japan contributed just 0.07 percentage points. China's potential growth and that of Asia and the Pacific also fell, but their contributions to the change in the world's potential growth were positive, 0.33 percentage points and 0.11 percentage points, respectively. The other economies contributed 0.19 percentage points to the decline. Decomposing the sources of the decline into the contributions of labor force growth and labor productivity growth, the former declined by 0.55 percentage points, while labor productivity growth increased by 0.15 percentage points.     

What caused the Asian currency and financial crisis?

The paper explores the view that the Asian currency and financial crises in 1997 and 1998 reflected structural and policy distortions in the countries of the region, even if market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than warranted by the initial weak economic conditions. The first part of the paper provides an overview of economic fundamentals in Asia on the eve of the crisis, with emphasis on current account imbalances, quantity and quality of financial ‘overlending’, banking problems, and composition, maturity and size of capital inflows. The second part of the paper presents a reconstruction of the Asian crisis from the antecedents in 1995–1996 to the recent developments in early 1999 in parallel with a survey of the debate on the strategies to recover from the crisis, the role of international intervention, and the costs and benefits of capital controls.     

Convergence or divergence?*: The South Korean state after the Asian financial crisis

This study suggests that the government's attempt to replace the developmental state by introducing neo‐liberal axioms is slim. The state that is to emerge in consequence of the economic and financial reforms carried out by the Kim government is distinct from the neo‐liberal regulatory state at the ideological level; moreover, the embedded characteristics of the developmental state hinder changes in the nature of the state. It is the paper's argument that the economic reform that has been implemented by the Kim Dae‐Jung government since its establishment (in 1998) is merely a form of “self‐help” to correct those mistakes committed by the developmental state. Despite the neo‐liberal reform attempted by the Kim government, the social, political and historical conditions in which a liberal regulatory state may be born are pre‐mature, and the embedded legacies of the developmental state are far from becoming a thing of the past.     

Lessons from the global financial crisis – the case of Mainland China and Hong Kong

Abstract

The analysis of the intertwined reactions of Hong Kong and Mainland China to the 2008 Global Financial Crisis is considered in this study through the lenses of their stock markets. The GARCH-based analysis of stock market performance over the period December 2011–December 2014 shows that trade and equity sectors were the sectors most affected by the global recession; volatility was prevalent on the Shanghai stock market, whereas volatility persistence characterised the Hong Kong stock market. The results also show that the two stock markets recovered quite quickly. Tight controls applied by the financial authorities helped ensure some stability during the crisis.     

Do global financial crises validate assertions of fractal market hypothesis?

The frequent occurrence of crises in recent decades has triggered a debate between the proponents of Efficient market hypothesis and Fractal market hypothesis. While, the proponents of Efficient market hypothesis view crises as non-existent and highly improbable, the advocates of Fractal market hypothesis view crises as the dominance of certain investment horizons. We test whether the assertion of Fractal Market hypothesis regarding the dominance of certain frequencies during financial crises hold for the global stock markets. Following Kristoufek (Sci Rep 3:2857, 2013) the wavelet power spectra based on continuous wavelet framework are used to test the said hypothesis. It is shown that stock markets around the globe indicate the dominance of higher frequencies during the crises periods, hence, validate the assertions of Fractal market hypothesis. The results drawn are robust to the use of different countries as well as different crises.     

The determinants of bilateral FDI: Is Asia different?

Intra-Asian foreign direct investment (FDI) is dominated by flows from high technology economies to medium technology economies, while FDI elsewhere primarily consists of flows among high technology economies. This distinctive pattern is not due simply to differences in the relative distribution of Asian FDI recipients by technology, or to systematic differences in Asia's technology characteristics. A gravity model analysis is used to explore whether Asian FDI patterns differ significantly from those elsewhere, and if so, in what ways. The results show that Asian FDI flows, in contrast to other FDI flows, systematically favor hosts with relatively low technology achievement and relatively strong intellectual property rights regimes. This type of “Asian exceptionalism” is consistent with “flying geese” theories that have argued that Asian development is the result of technology flows among economies that occupy nearby rungs of the technology ladder.     

The relationship between revenue diversification and bank performance: Do financial structures and financial reforms matter?

This paper contributes to the existing literature by investigating the impact of revenue diversification on bank performance through a broad array of financial reforms, including credit controls, interest rate controls, entry barriers, banking supervision, privatization, and financial account restrictions. This analysis is the first to investigate whether financial structures (bank- or market-based systems) change the effect of diversification on individual bank performance. We use a panel dataset sample from 29 Asia-Pacific countries covering the period between 1995 and 2009, for a total of 2372 banks. Unlike the results of previous studies based on data from the U.S. and Europe, this study confirms the hypothesis of the portfolio diversification effect for the Asia-Pacific banking industry. For bank-based groups, bank performance can be improved through diversification, supporting the “bank-based view” hypothesis. Finally, under different financial systems, the relationships among revenue diversity, financial reforms, and bank performances are multidimensional.     

The co-movement of stock markets in East Asia: Did the 1997–1998 Asian financial crisis really strengthen stock market integration?

This paper examines the integration and causality of interdependencies among seven major East Asian stock exchanges before, during, and after the 1997–1998 Asian financial crisis. For this purpose, we use daily stock market data from July 1, 1992 to June 30, 2003 in local currency as well as US dollar terms. The data reveal that the relationships among East Asian stock markets are time varying. While stock market interactions are limited before the Asian financial crisis, we find that Hong Kong and Singapore respond significantly to shocks in most other East Asian markets, including Shanghai and Shenzhen, during this crisis. After the crisis, shocks in Hong Kong and Singapore largely affect other East Asian stock markets, except for those in Mainland China. Finally, considering the role of the USA shows that it strongly influences stock returns in East Asia – except for Mainland China – in all periods, while the reverse does not hold true.     

The determinants of increasing equity market comovement: economic or financial integration?

This paper investigates to what extent the substantial increase in exposures of local European equity market returns to global shocks is mainly due to a convergence in cash flows (“economic integration”), to a convergence in discount rates (“financial integration”), or to both. We find that this increased exposure is nearly entirely due to increasing discount-rate betas. This finding is robust to alternative ways of calculating discount-rate and cash-flow shocks.     

Asian financial crisis and East Asian economic cooperation: A Chinese view∗

The Asian financial crisis has devastated East Asia in many aspects. While social unrest was witnessed in some states, social problems have arisen in others because of the reforms undertaken. States undergoing reforms are learning their lessons at a very expensive price. These are lessons essential and vital to the cause of regional cooperation. From a theoretical perspective, without these lessons, the debates on the need and importance of regional cooperation would have gone on incessantly without any real progress. Although expensive, once the crisis‐hit states succeeds in instituting the reforms attached to the financial package from international financial institution, the future prospects for regional economic cooperation are not too unfavorable. While China can afford to maintain its current position on the crisis, the rest has an obligation to fulfill its responsibility so as to lay a solid foundation for regional cooperation to ripen.     

How China's accession to the WTO affects global welfare?

Conventional wisdom suggests that, if a large nation reduces tariffs, the Rest of the World (RoW) as a whole should immediately experience gains from trade. However, little simulation evidence has been provided to evaluate the welfare effects of China's tariff reduction upon its WTO accession on each of its trade partners. This paper addresses the above issue under both the perfectly competitive model and the monopolistic competition framework à la Eaton and Kortum (2002) and Melitz (2003). Armed by the method of Dekle, Eaton, and Kortum (2007, 2008) to quantify the individual countries' responses to the “China (trade liberalization) shock” at equilibrium, we could check the extent to which global welfare benefit from the import tariff reduction after China's entry into the WTO. The quantitative results show that, both China and the RoW benefit from Chinese participation into the WTO, with estimated welfare gains falling in a range of [1.4697%, 3.8743%] and [0.0743%, 0.1015%], respectively. That is to say, about 58.24% of total benefits extracted from China's accession into the WTO worldwide flow to countries other than China under perfect competition; while under monopolistic competition, the whole world enjoys a 0.1571% welfare increases if firms' entry is restricted, of which 42.64% are injected into the RoW, an equivalent amount of 23.3903 billion US dollars. Since allowing for firms' entry and exit would lead to adjustments in both aggregate price indices and government tariff revenues, welfare gains of the world significantly increase (0.2474%), but these adjustments would slightly distort the welfare changes for other countries in the sense that only 36.50%, which is equivalent to 32.1008 billion US dollars, overflow to the RoW. As a result, some countries gain more, while some less.     

The distribution of financial aid in China: Is aid reaching poor students?

China's central government incrementally introduced various kinds of student financial aid since the late 1990s in response to public concerns about the rising burden of college prices. Despite the marked increase in financial assistance from governmental as well as non-governmental sources in recent years especially, little is known about how well aid is currently distributed across Chinese universities and whether it is successfully reaching needy students.We use a unique randomly-sampled dataset of all local senior college students in one northwest province and a combination of non-parametric, semi-parametric and fixed effects methods to examine how various types of financial aid are currently distributed to students of different backgrounds across the university system. We also evaluate whether aid is reaching the main target population of low-income students. We primarily find that government-financed aid is allocated evenly across universities of varying selectivity and is reaching its target population of low-income students within universities. By contrast, university- and society-financed aid is not reaching low-income students. In addition, students in the most selective universities receive large implicit subsidies as they have high instructional costs, get more aid, and pay low tuition fees. Finally, a significant proportion of disadvantaged students do not seem to receive any type of aid.     

The Asian crisis: what did we learn and when did we learn it?

This paper steps back from the detail of the Asian crisis, to ask whether the 1997 crisis advanced our broad understanding of the age‐old problem of economic crises. Some immediate lessons were learned from the failures of the crisis‐response in Indonesia, which was the worst‐affected economy. It is notable, however, how little changed to address the ongoing systemic weaknesses. Three areas of unresolved vulnerability can be identified. First, the sudden stops and reversals of international capital flows. Second, the intrinsic fragility of a financial system that borrows short and lends long. Third, unanchored exchange rates, where the market's price‐discovery can take the rate to levels far from equilibrium, for sustained periods. For more than a decade after the Asian crisis, international capital flows continued to be seen as unambiguously beneficial, with any attempts at capital flow management rejected. At a global level, it was not until the 2008 financial crisis that widespread financial fragility was addressed through tighter regulation and higher capital requirements. On exchange rates, misleading advocacy of corner solutions—either pure floating exchange rates or immutable fixed rates—continued in the face of the real‐world experience that sometimes intervention is needed to maintain an exchange rate close to equilibrium.     

Sowing the seeds for the subprime crisis: does global liquidity matter for housing and other asset prices?

We assess the relationship between global liquidity and two important classes of asset prices on a global scale. For this purpose, we estimate a variety of VAR models for the global economy using aggregated data which represent the major OECD countries. According to the impulse responses obtained a positive shock to global liquidity raises the global house price index and later on via commodity prices also the global GDP deflator to the same extent. Hence, we conclude that there are subsequent spill-over effects from house prices to the overall price level. However, we are not able to find any empirical evidence in favor of the hypothesis that stock prices significantly react to changes in global liquidity.

Loan interest rate pass-through and changes after the financial crisis: Japan’s evidence

We estimate interest rate pass-through in the loan market using an individual bank-based panel dataset from Japan. Previous studies using data from European countries have presented a number of common findings, including that banks with a high proportion of relationship lending tend to set lower pass-through. In this respect, we have obtained similar results using a dataset for Japan going back to the early 2000s. We further examine the influence of borrowing firms’ balance sheet characteristics on loan interest rate pass-through, and find that these additional factors are also important determinants for pass-through dispersion. However, after the recent global financial crisis, even banks with a high proportion of relationship lending have largely lowered loan interest rates by raising pass-through, and pass-through has not necessarily been determined in accordance with borrowing firms’ balance sheet characteristics. These results differ from those of recent studies on European countries. Possible background factors explaining this change are that (i) pressure to lower loan interest rates has risen due to extensive monetary easing and greater lending competition among banks, while Japan’s banking system as a whole has maintained its resilience in the post-crisis period; (ii) demand for bank loans has increased substantially due to disruptions in the market for alternative funding sources, such as commercial paper and corporate bonds; and (iii) public measures to increase bank loans have been broadly introduced in Japan.     

How will financial liberalization change the Chinese economy? Lessons from middle-income countries

This study projects the impact of financial liberalization in China by drawing on the experiences of 60 middle-income economies over a period of four decades. Our results suggest that comprehensive financial reform could increase GDP growth per capita by up to 1.4% points and raise the real bank lending rate by up to 5.1% points. Perhaps the most unexpected result is a massive increase in net capital inflows by up to 20.1% of GDP, which could plant seeds for financial risks later. The probability of a currency crisis could increase by up to 21.7% points, but the probability of a banking crisis may rise or fall, depending on the quality of bank supervision. We also find different policy impacts of different financial reform measures. Bank ownership reform and regulatory reform are critical in supporting economic growth and financial stability. These findings offer important policy implications on how to derive maximum benefit from financial reforms while effectively mitigating potential risks.