The Root of Asia’s Problems

It’s difficult even within the context of a ’closed economy’ to know just how much credit there is within the wider system and the situation is even harder to quantify when one comes to international credit flows. The official balance of payments data for a donor country (i.e. Japan, Europe or the USA) tends to simply show the equivalent of the banks’ capital / reserve deposits in a domestic system. This is why data differs so much between what is ‘received’ by countries which attract credit flows’ tends and what the donors appear to send.
Nevertheless, we can argue with some certainty that the post 1985 surge in global capital flows have given rise to what is in reality a long and winding chain of potentially highly leveraged flows that contains within it currency, maturity and most of all liquidity miss-matches. These are the building blocks for a financial crisis and it’s this illiquidity problem that lies behind the recent Asian economic slowdown and the growing signs of illiquidity within these economies. Unwinding this process has seen credit conditions continuing to tighten in many if not most of the EM. Therefore, despite the recent short-covering rally in financial markets, we believe that even now we have significantly more economic weakness in Asia ahead of us.
Somewhat surprisingly, it as the European banks were the primary donors of credit funds to the EM in 2013 and 2014. However, data suggests that this activity cooled quite dramatically in 2015H1 and that it has gone into dramatic reverse over recent months, primarily we believe because of the actions of Europe’s bank regulators
Blog by Sophie