asian econ

8/14/2019 asian econ

http://slidepdf.com/reader/full/asian-econ 1/13

abcGlobal Research

The meltdown of the US subprime-

related market has two channels of

influence on Asian economies: (i)

financial markets; and (ii) the real

economy

The impacts on Asian growth of the

seize-up of markets for asset-backed

securities and generally tighter credit

conditions look limited

The real concern is a slowdown orrecession in the US economy, but even

here there are grounds for optimism

that the growth impacts will be modest

Trading places

A decade ago, the Asia Crisis rocked the region and sent

financial and economic shock waves around the world.

Then, the impact on the US economy was negligible. Now,

Asia looks relatively secure against shock waves emanating

from the US economy as a result of the meltdown of the US

subprime mortgage market, the seize-up of the market for

asset-backed securities, and the more general tightening of

credit conditions. The impacts on Asia will come via two

channels—financial and the real economy.

The financial impacts of credit market dislocation by itself

on growth in the region look likely to be small. Exposure to

subprime-related securities is relatively low. Transactionsinvolving asset-backed securities in the region make up only

a small fraction of the world total. Credit spreads have

widened, but not to onerous levels, although this remains a

risk. Frothy deals have been shelved, but the bank credit

mechanism is largely functioning normally, especially for

non-financial corporations.

The real worry is if the US real economy slows sharply.

Even here there are grounds for optimism that the impacts

will be limited. Asian exports are diversifying away from US

demand, China and India look relatively well-placed to ride

out the impacts, and liquidity conditions are generally

supportive.

Macro

Asian Economics

Asian economies andthe subprime messSo far only a phoney war

31 August 2007

Peter Morgan*

Economist

The Hongkong and Shanghai Banking Corporation Limited (HK)

+852-2822-4870 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations

Issuer of report: The Hongkong and Shanghai BankingCorporation Limited

Disclaimer & Disclosures.This report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, that form part of it.



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Shock waves and scenarios

A decade ago, the Asia Crisis rocked the region

and sent financial and economic shock waves

around the world. At that time, the impact on the

US economy was negligible. This time, the shock

waves from the meltdown of the US subprime

mortgage market are reverberating around theglobal financial system. For Asia, the impact will

depend both on the size and nature of those

external financial and economic shocks, and on its

underlying financial and economic fundamentals.

At this time, our forecasts for the US economy

have not been changed, other than raising the

target for the unemployment rate to 5.25% by

early 2008 and lowering the target for the Fed

Funds rate to 4.75% by the end of this year. In a

recent report entitled Panic Stations … and the

journeys beyond (20 August 2007), HSBC’s

group chief economist Stephen King presents

three possible scenarios: first, a return to business

as usual, second, a continuation of good global

growth but only through the delivery of much

lower interest rates and, third, the onset of an

extended credit crunch.

Scenario 1: A major credit crunch is averted, andcredit spreads widen significantly, but not enough

to substantially curtail business investment

activity and consumer spending. Central banks,

while facilitating the provision of additional

liquidity during periods of financial volatility,

remain focussed upon the medium-term goal of

price stability, and the policy tightening already

underway in many economies resumes as

normality returns.

Scenario 2: Financial market volatility proves to

be more persistent and disruptive, and a greater

Asia economies and thesubprime mess

The meltdown of the US subprime-related market has two

channels of influence on Asian economies: (i) financial markets;

and (ii) the real economy

The impacts of the seize-up of markets for asset-backed

securities and generally tighter credit conditions in Asia look

limited

The real concern is a slowdown or recession in the US economy,

but even here there are grounds for optimism that the growth

impacts will be modest



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degree of contagion to hitherto healthy and

seemingly unrelated areas of the financial markets

occurs. A true credit crunch occurs as the banking

system loses either the ability or willingness to

extend credit across the economy. Policy rates are

reduced (most likely in tandem across the major

economies), in order to restore confidence,

alleviate liquidity problems across the financial

system and to mitigate the effects upon the real

economy. In the recent experience of financial

crises, the LTCM and Russia crisis of 1998 may

fit in this category, since the US Federal Reserve

in fact cut the Fed Funds rate by 75 bps then, and

there was little observable impact on real activity.

However, a lively debate has emerged about

whether or not the Fed’s actions were necessary,

and whether the LTCM/Russia crisis should have

treated as being a case of the first scenario.

Scenario 3: This initially follows the trail of

scenario 2, with a true credit crunch developing,but with less of a positive response to monetary

loosening within the financial sector and a greater

spill over to the real economy. This causes interest

rates to ultimately fall to low levels for a sustained

period. This resembles the reaction of the US

economy after the S&L crisis of the late 1980s

and the collapse of the IT bubble in 2000, as well

as, in even more extreme forms, the collapse of

the Japanese bubble in 1990 and the Asia Crisis in

1997. Substantial deleveraging is a commonfeature of these episodes, which also tends to

dampen the effects of low interest rates in

stimulating a recovery in demand for credit.

Which scenario is most likely to apply to the

current situation? In retrospect, the health of the

underlying macroeconomic fundamentals prior to

the financial crisis seems to be crucial to the

response of both the financial sector and real

economy to monetary easing. The US economy is

substantially weaker now than in 1998, when it

posted robust growth of 4.2%. On the other hand,

the situation does not appear to be as dire as in the

early 1990s or at the time of the IT bubble

collapse. Although the housing market has

weakened sharply, the banking sector itself is in

much better shape than during the S&L crisis,

precisely because much of the toxic debt has been

offloaded to the non-bank financial sector. At this

stage, the Fed’s latest Senior Loan Officer Survey

shows only a modest tightening of lending spreads

for commercial and industrial loans, nowhere near

what took place during the two previous economic

downturns. Moreover, the US corporate sector

still looks reasonably healthy, with debt levels

much reduced.

1. Loan standards only being tightened modestly

Tightening loan s tandards

-30-20-10

0

102030405060

90 92 94 96 98 00 02 04 06

-30-20-100

102030405060

Large & m ed. firms Small firms

Source: Federal Reserve Senior Loan Officer Survey

On the other hand, Asian economies are in good

health, reflecting substantial restructuring in the

decade since the Asia Crisis and strong growth in

the latest generation of Asian tigers—China, India

and Vietnam. Corporate balance sheets have been

strengthened substantially, bank non-performing

loan ratios have fallen sharply, current account

balances are mostly in surplus, and foreign

exchange reserves have been built up massively.

Moreover, Asian financial institutions have taken

a fairly conservative approach, with less reliance

on leverage and asset-backed securities than their

counterparts in the US and Europe.

In this report, we assess two channels of impact:

(i) the immediate effects of financial contagion

emanating from the seize-up in the asset-backed



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securities market; and (ii) the impact of a harder

landing of the US economy. The basic conclusion

is that the impacts from the first look modest, and

that the second remains the main risk for the

region. Even regarding the second, however, we

see a number of positive mitigating factors.

Financial contagion—aphoney war

The direct exposure of Asian financial institutions

to radioactive holdings of subprime-related asset-

backed securities looks limited compared with

levels in the US and Europe. Overall data on

holdings of US corporate asset-backed securities

have been obtained from the US Treasury’s

Foreign Portfolio Holdings of U.S. Securities. The

most recent data are for 30 June 2006, so the

overall levels presumably have risen somewhat

since then. These figures represent a maximum

potential exposure, since they include securities

backed by prime as well as subprime loans, and

Asian banks tended to take a conservative

approach, investing primarily in AAA-rated paper.

2. Asian holdings of US corporate asset-backed securities

June 2006 Mortgage- % of bank ReportedUSD bn backed Others Total assets subprime

China 9.5 5.3 14.8 0.2 11.9HK SAR 5.2 1.5 6.7 0.5 1.6Japan 19.8 16.4 36.1 0.6 8.3Korea 0.8 0.1 0.9 0.1 0.5Malaysia 0.0 0.2 0.2 0.0 0.0Singapore 1.9 3.4 5.3 0.7 0.4Taiwan 0.5 1.0 1.5 0.5 1.6Thailand 0.1 0.0 0.1 0.0 0.0Total 37.7 27.9 65.6 0.4 24.3

Source: US Treasury, Company data, Reuters, HSBC

Total holdings of mortgage-backed securities for

the region amounted to USD37.7 billion, about

11% of total foreign holdings, while holdings of all

US ABS totalled USD65.6 billion, also about 11%

of the foreign total. This is significantly less than

the amount held in the UK, USD88 billion. The

share of total bank assets is relatively small, only

0.4%. Japanese institutions hold over half of the

total, USD19.8 billion, and a total of USD36 billion

for all ABS, but this still only represents 0.6% of

total bank assets. China has the second-largest

holdings, at USD14.8 billion, followed by Hong

Kong and Singapore. The ratio to bank assets for

Singapore is actually the largest, at 0.7%.

As a check, the right-most column shows the total

of company-reported exposure to subprime paper,

which, so far, amounts to USD24 billion, well

below the survey total for mortgage-backed

securities. By country, the main discrepancies arein China, where the reported figure of subprime

exposure is USD11.9 billion, the largest in the

region and higher than the survey total for

mortgage-backed securities, and in Taiwan, with

reported subprime exposure of USD1.6 billion. In

other countries, the reported totals are less than

the survey figures.

Of course, the exposure of individual institutions

may be considerably larger. Company

announcements so far have revealed one Chinese

bank with an exposure of 1.3% of total assets.

Potential losses relative to net asset value have

been estimated as high as 2%-3% in some

individual cases. However, these figures do not

appear to represent a substantial systemic risk for

the region, particularly in the case of China,

which is still largely isolated from global capital

market contagion.

The second avenue of contagion has been thegeneral seize-up of trading of asset-backed

securities due to the inability to value such assets,

and along with that, an unwillingness to roll over

commercial paper that was backed by such assets.

However, BIS statistics show that total value of

trading of interest-rate options in Asia last year

amounted to only USD5.6 trillion, or a little over

1% of all such trading. Some regional banks also

had conduits for holding ABS off their balance

sheets, and may experience trouble rolling overtheir financing for such conduits, but, again, the

overall figures look small.



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3. Asian dollar bond yield spreads have widened moderately

Spread v s. US Treasuries, bps

0

200

400

600

800

1000

97 98 99 00 01 02 03 04 05 06 07

0

200

400

600

800

1000

As ia USD bond Asia high-y ield corporate

Source: HSBC

The general tightening of credit conditions has led

to a cooling off of the new issue market for

corporate bonds, both on the demand and the

supply side. New issuance plans for high-yield

debt and convertible bonds have dropped sharply.

These developments have also stifled leveraged

facilities for acquisition purposes, although some

smaller, less-leveraged, deals are still proceeding.

HSBC’s index for spreads of Asian dollar bonds

relative to US Treasuries has widened by about

80-90 bps from the near-term low. However,

spreads have merely returned to the levels seen in

2004, and are still well below the levels associated

with recession in 2000-01, and nowhere near the

levels seen during the Asia Crisis period of 1997-

98. Spreads on high-yielding Asian dollar bonds

have widened by about 140 bps from the near-

term low. Of course, the downside risks for the

economy would increase if spreads widen

significantly further.

Bank lending behaviour has tightened as well,

although with more of a bias toward financial

institutions, since they are most likely to suffer

losses in connection with holdings of subprime

assets. Lending generally is not being cut, but

unused credit lines are being snugged in, and any

unusual requests are being scrutinised carefully.

Banks are looking much more critically at any

“covenant-lite” structures, and lending structures

generally are being tightened up. However, there

has been little change in the terms of lending to

non-financial corporates, and loan spreads have

not widened substantially. Given the sharp rise in

bond yield spreads, this suggests that corporates

may turn increasingly to bank lending, which had

always been the workhorse of corporate fund-

raising in Asia anyway.

Table 4 shows the breakdown of debt for Asian

countries excluding Japan between debt securities

and loans, and between international (overseas)and domestic liabilities. Overall, debt securities

account for less than 20% of total debt financing.

This result is dominated by China, but, the

unweighted average rate for the region is almost

exactly, the same, 19.4%. This suggests that

private companies will only suffer moderate

impacts in terms of funding costs, assuming that

loan rates do not rise as much as bond yields do.

The exposure to debt securities in international

funding is almost twice as high as for domestic

4. Outstanding private sector debt, March 2007-by nationality

March 2007 ________________Total debt ________________ ________ Debt securities, % of total _________USD billion Total International Domestic Total International Domestic

China 3124.3 126.0 2998.4 13.5 20.1 13.3Hong Kong 629.2 254.1 375.1 15.3 24.9 8.8India 578.6 83.7 494.9 8.2 31.9 4.2Indonesia 140.7 45.8 94.9 14.2 26.8 8.1Malaysia 315.3 55.7 259.5 36.8 52.0 33.5Philippines 60.2 25.5 -- 17.1 40.4 --Singapore 466.0 310.7 155.3 14.6 14.4 14.9

South Korea 1520.9 208.2 1312.7 42.4 45.3 41.9Taiwan 657.6 63.9 593.6 11.8 33.9 9.4Thailand 231.1 30.4 200.7 19.7 29.0 18.3Total 7667.8 1204.1 6463.8 19.5 27.9 17.9

Source: BIS, HSBC



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funding, 31.5% vs. 17%, suggesting that reliance

on overseas funding will diminish. Only two

countries stand out as having a relatively high

dependence on debt securities—Malaysia and

South Korea, both over 40%. This suggests that

these two countries are most exposed to this kind

of contagion risk.

This tightening of credit conditions is expected to

have some chilling effect on capital investment in

the region, except in China, which is mostly

insulated from overseas credit conditions. That is

not to be minimised, since 55% of all capital

investment in Asia ex Japan takes place in China.

In addition, given that the extent of the rise in

bond yields is modest so far, we believe that the

overall impact on capital investment will be

limited at this stage. This is particularly so

because cash flow levels are generally high, so

firms are not desperate to borrow to finance

capital spending (see Table 5). As discussed

below, capital investment would probably slow

much more in response to a downturn in the

US economy.

Real economy the real risk

As a result, we believe that the major risk to Asian

economies is a more pronounced slowdown in the

US, including a possible recession. We would not

argue that Asia is immune from a US slowdown,

but we have noted in recent reports that Asian

growth is probably less sensitive to the US

economy than previously, i.e., it has at least

partially de-coupled from US growth. This

reflects three major factors:

Asian exports have been diversifying away

from the US, particularly to other markets that

have stood up better, including China, Europe

and non-Asian emerging markets in areas like

Eastern Europe, the Middle East and

Latin America.

Growth dynamism in Asia is shifting to the

larger, more closed economies such as China

and India, and this should benefit the rest of

the region.

Liquidity conditions in the region are still

generally supportive for growth, with interest

rates low and inflation generally well-behaved,

except for concerns about food prices.

Diversification of export demand: The share of

Asian exports to the US has fallen substantially in

recent years to only 18% in 2006. To be sure,some of this reflects the increased splitting up of

production processes in Asia, especially to China,

and US final demand may still be the key driver.

However, other non-Asian markets are becoming

increasingly important final destinations, and

demand in those markets has generally held up

better. The export share of the EU has been stable,

while those of non-EU Europe, the Middle East

and Latin America have been rising.

5. Ratio of capital investment to cash flow

1994 1995 1996 1997 2001 2002 2003 2004 2005

China N/A N/A 2.45 1.34 0.72 0.72 0.68 0.85 0.76India 1.74 1.89 1.68 1.16 0.39 0.41 0.39 0.50 0.65Indonesia 3.10 2.15 2.00 3.63 0.62 0.68 0.66 0.57 0.73Korea 1.24 1.71 2.29 3.26 0.95 0.57 0.59 0.67 0.77Malaysia 1.24 1.42 1.11 1.58 0.81 0.69 0.63 0.63 0.66Philippines 1.27 1.76 1.42 2.60 1.00 0.44 0.53 0.61 0.53Taiwan 0.75 1.36 1.13 1.50 0.97 0.69 0.57 0.77 1.03Thailand 3.08 3.48 2.51 3.88 0.58 0.87 0.42 0.63 0.86

Source: Bloomberg, HSBC. Note: Total capital investment/CFO of MSCI corporates.



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6. Share of Asian exports by destination

Change% of Total 1990 1995 2000 2006 90-06

US 25.7 22.0 23.7 17.9 -7.8EU 18.4 15.4 16.2 15.6 -2.7Japan 8.8 8.6 8.6 6.9 -1.9China 3.9 7.1 8.1 13.2 9.2Asia ex CJ 28.6 34.3 31.6 31.4 2.8Non-EU Europe 2.3 1.5 1.4 3.5 1.2Middle East 2.9 2.5 2.6 3.4 0.5Latin America 2.2 3.0 2.9 3.2 1.0Others 7.2 5.6 4.9 4.9 -2.3

Source: IMF DOTS database

The chart below shows the contribution to growth

of the total value of all Asian exports by major

destination. Previously, there had been a high

correlation between growth of exports to the US and

growth of exports to other major destinations, but

signs of divergence have emerged more recently.

7. Asian exports to major destinations rising faster

Y-o-y% contrib., 3mma

-6-4-20246

810

00 01 02 03 04 05 06 07

-6-4-20246

810

US EU Japan

China Asia xCJ Other

Source: CEIC and HSBC (US dollar terms)

This year, Asian export growth to the US has

stalled to the slowest pace in over four years.Along with this, exports to Japan and Asia

excluding China and Japan have slowed

somewhat. Nevertheless, exports to the EU, China

and “others,” mainly non-Asian emerging

markets, have maintained healthy growth. The

latter includes Russia, the Middle East and Latin

America, where high commodity prices have

helped to support demand. Exports to “others”

have continued to rise by over 20% y-o-y in

recent months. As a result, total Asian exports inApril-June still managed a respectable growth rate

of 13.6% y-o-y.

Perhaps the most significant development is that

correlations of Asian export growth to other

regions with export growth to the US, which had

been consistently high, dropped sharply last year.

Chart 8 shows the four-year moving correlation

(based on quarterly year-on-year growth rates) of

growth of exports to the US with that for other

major destinations. Until 2005, most of the

correlations had been rising, and all were quite

high, over 0.80 in 2004. The correlation with total

Asian exports was consistently over 0.90 from

2002 through 2005.

8. Correlations with export growth to the US down sharply

4-y ear correlation w ith Asian ex ports to US

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

00 01 02 03 04 05 06 07

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Total EU Japan

China Asia x CJ Other

Source: HSBC

However, that with China began falling in early

2004, and dropped all the way to zero by the end

of last year, indicating no correlation. All major

correlations have been dropping since mid-2005,

with exports to the EU and “others” falling to

nearly zero as well. These correlations havelevelled out recently, but at very low levels. This

provides more evidence of de-coupling from

US growth.

Shift toward more closed economies: The

degree of exposure of Asian GDP to US growth

varies substantially by country, depending on the

degree of openness of the economy to trade. Table

9 shows the share of exports in GDP for each

country, followed by the shares of exports to the

US and the US plus other Asian countries in GDP.

The latter is probably the best measure of



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exposure to the US, since it captures the indirect

exposure as a result of outsourcing in Asia. The

share of exports in GDP varies widely, with Japan

and India having the smallest shares (10% or

less), followed by Indonesia, China and Korea,

while Singapore, Hong Kong SAR and Malaysia

have the largest shares. The key point is that

China and India, the two largest fast-growing

economies have relatively low exposures to

US growth.

9. Exposure of Asian economies to US growth

CY2006 Exports/ ___Share of GDP ____% GDP US US + Asia

China 36.6 7.7 22.3Hong Kong SAR 166.9 26.4 125.8India 15.2 2.3 6.0Indonesia 27.6 3.1 20.3Japan 14.8 3.3 10.4Korea 36.6 4.9 23.0Malaysia 107.9 20.3 79.5Philippines 40.3 7.3 30.4Singapore* 108.6 16.5 75.0Taiwan 58.5 8.4 45.0Thailand 62.1 9.3 40.0Vietnam 65.0 11.9 45.5

Source: HSBC, CEIC

Our regression models estimating the impact of a

one-percentage point change in US GDP growth

on GDP growth in each country yields similar

conclusions. Table 10 shows the overall impact

estimates. On the whole, they are significantly

correlated with the shares of exports in GDP in

Table 9. China, India, Indonesia and Japan have

the smallest impacts, while Taiwan, Hong Kong

and Singapore have the largest impacts, with a

multiplier of one or greater. For Asia as a whole,

on a GDP-weighted basis (purchasing-power-

parity weights), the impact is relatively small, 0.3

percentage point, reflecting the large weights for

China and India. This is positive for the region,

since the large economies have relatively

small impacts.

10. Impact of one percentage point change in US growth on GDP

(Percentage points)

China 0.2Hong Kong SAR 1.2India 0.2Indonesia -0.1Japan 0.4Korea 0.6Malaysia 0.6Philippines 0.6Singapore 1.0Taiwan 1.6Thailand 0.2

Source: HSBC Note: Total impact (4) = (1) + (2)x(3)

Since the US economy has slowed by a little over

one percentage point over the past year, this

implies a slowdown of only about 0.4 percentage

point for Asia. At this stage, consensus forecasts

show no expected slowdown in Asia at all this

year, and only reduction in growth of 0.2

percentage point in 2008. This partly reflects the

fact that China and India, which we have argued

are less sensitive to US growth, have actually seen

upward surprises in growth.

Easy liquidity conditions support growth:

Strong growth of liquidity in the region provides a

third source of support for decoupling from US

growth. This liquidity growth is driven by the

rapid increase of foreign exchange reserves across

the region and the relatively low level of interest

rates, supported by good inflation performance.

The overall current account surplus for Asia

(major 12 economies) reached 5.3% of GDP in

2006, a record-high level, while that for Asia ex

Japan reached 6.3%, also a record. Among larger

economies, China led the way with a surplus of

9.4% of GDP. Moreover, the combined current

and capital accounts of Asian countries have

averaged about 6% of GDP in the last three years.

Needless to say, Asian central banks chose to step

in as the buyers of last resort of foreign

currencies, mainly US dollars, since they were

unwilling to accept the sharp currency rises that

would have happened otherwise. Although central

banks typically sterilise such intervention, for the



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region as a whole, we have found a significant

correlation between the growth of foreign

exchange reserves and the growth of base money

(high-powered money). Chart 11 shows the actual

growth of base money in Asia ex China and

Japan, together with estimated values derived

from a regression equation using changes in

foreign exchange reserves as the independent

variable. The fit is quite close. This result is

particularly important since the growth of reserves

has been accelerating recently, hitting 22% last

year for Asia ex Japan and 15% for Asia ex China

and Japan.

11. Actual and predicted growth of base money for Asia exChina and Japan (US dollar base)

Y-o-y%

-5

0

5

10

15

20

99 00 01 02 03 04 05 06

-5

0

5

10

15

20

Actual Predicted

Source: CEIC, HSBC

With money multipliers across the region

generally flat or rising, rapid and accelerating

growth of credit in the range of 12%-20% y-o-y is

being seen in China, Hong Kong, India, Indonesia

and Korea, with the fastest growth occurring in

China and India. This has happened despite

monetary tightening in all of these countries

except Indonesia, where Bank Indonesia has been

easing aggressively after the mini-currency crisis

in 2005.

12. Countries with rapid loan growth

Y-o-y% change

-15-10

-505

101520253035

99 00 01 02 03 04 05 06 07

-15-10-505101520253035

CH HK IN ID KR

Source: CEIC

Three countries are seeing somewhat lower loan

growth in the range of 5%-10%. Loan growth in

the Philippines and Singapore has been

accelerating as well, while that for Malaysia has

slowed. The weakest loan growth has been in

Japan, Taiwan and Thailand, with weak credit

demand in the latter two countries being due to

political problems.

ConclusionsThe subprime meltdown in the US housing market

has two channels of influence on Asian

economies—(i) financial, mainly via the seize-up

in markets for asset-backed securities and the

more general tightening of credit conditions; and

(ii) real, i.e., the eventual negative impacts of a

slowdown in the US economy.

The financial impacts on Asia are expected to be

limited for a number of reasons. The total exposureof Asian financial institutions to asset-backed

securities directly related to subprime loans is

relatively small. Asian holdings of US mortgage-

backed securities amount to USD37.7 billion, only

about 11% of foreign holdings. Total holdings of

US corporate ABS amount to USD65.6 billion,

which are only 0.4% of bank assets. Japanese

institutions have the largest exposure in absolute

terms, followed by China, Hong Kong and

Singapore. Ratios to bank assets in all cases are lessthan 1%, although some individual institutions bear

considerably larger risks. Overall trading of



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interest-rate options in Asia amounts to only about

one percent of the global total. Credit spreads have

widened, but only back to levels seen in 2004, not

particularly onerous. Of course, a further

substantial widening of credit spreads would

ratchet up the financial impact.

New issuances have in many cases been cancelled

or postponed, as have highly leveraged deals

related to takeovers. Banks have tightened lines of

credit, but mainly to financial institutions, whilelending conditions for non-financial corporates

have not changed that much. Since 80% of

corporate debt comes from bank loans rather than

debt securities, and firms generally enjoy high

levels of cash and low levels of debt, the impact

on capital investment is expected to be modest.

Therefore, we regard the impact of the financial

channel alone to be equivalent to a “phoney war”.

The real impact to be concerned about is a

significant slowdown in the US real economy.

Asian economies are by no means immune to

such an event. However, there are grounds to

believe that the impacts would be mitigated by a

number of factors, including reduced export

dependence on the US, a shift of growth

momentum toward the large closed economies,

China and India, and generally easy liquidity

conditions across the region. Despite the fact that

US growth has slowed by over a percentage point

so far this year, consensus forecasts for this year

show no slowdown for Asia, and only a slight

slowdown next year. The upward surprises for

growth in the region have come mainly from

China and India, which we identify to be among

the least sensitive to US growth.



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Macro

Asian Economics

31 August 2007

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Disclosure appendix

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Additional disclosures

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12

Macro

Asian Economics

31 August 2007

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