Regional integration in Asia: Trends and Issues Cyn-Young Park Director Economic Research and Regional Cooperation Department Asian Development Bank ADB-ASIAN THINK TANK DEVELOPMENT FORUM 2017: Financing for Sustainable Urbanization in Asia and the Pacific 20-21 September 2017 Colombo, Sri Lanka
Outline Asia s Regional Integration Trends Asia-Pacific Regional Integration Index Trade and Global Value Chains Cross-border Investment Subregional Initiatives on RCI Key Messages 2
Asia s Integration Trends at a Glance Intraregional Shares (% of total) = data unavailable; FDI = foreign direct investment (flows data); Equity = equity asset holdings (stock data); Debt = debt asset holdings (stock data). Notes: Trade, equity and debt data as of January to June 2016 (H1 2016); migration data in 2000 and 2015 (available every 5 years); remittance data only available starting in 2010. Source: ADB calculations using data from Association of Southeast Asian Nations (ASEAN) Secretariat, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, World Bank, and national sources. 3
Asia-Pacific Regional Integration Index: Performance of sub-regions Regional integration in Asia-Pacific: Significant progress has been made, but the degree of regional integration varies across different subregions and socioeconomic dimensions 1.00 0.75 0.50 ASIA REGION AVERAGE 0.25 0.00 CENTRAL EAST S. EAST SOUTH OCEANIA 4
Asia-Pacific Regional Integration Index Insititutional and Social Integration Trade and Investment Integration 1.0 0.8 0.6 0.4 0.2 0.0 Money and Finance Integration Free Movement of People Regional Value Chain Infrastructure and Connectivity Central East Southeast South Oceania Pacific Source: ADB estimates. 5
World-wise normalization: APRII estimates Asia vs Other Regions Trade and Investment Integration 1.0 Insititutional and Social Integration 0.8 0.6 0.4 0.2 0.0 Money and Finance Integration Free Movement of People Regional Value Chain Infrastructure and Connectivity ASEAN Asia Africa Latin America EU 6
Trade and Global Value Chains 7
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Recent data point to a trade recovery Asia s Monthly Trade Value and Volume 1,000 900 800 700 600 500 400 300 200 100 0 20 15 10 5 0-5 -10-15 Trade value ($ billion, left scale) Trade volume growth (%y-o-y, right scale) Trade value growth (%y-o-y, right scale) y-o-y = year-on-year. Note: Asia includes the People s Republic of China; Hong Kong, China; India; Indonesia; the Republic of Korea; Malaysia; Pakistan; the Philippines; Singapore; Taipei,China; Thailand; and Viet Nam. Source: ADB calculations using data from CEIC; CPB Netherlands Bureau for Economic Policy Analysis, World Trade Monitor. https://www.cpb.nl/en/data (accessed September 2017). 8
Corr (GDP/IP (-1),Trade) Economic activities lead trade Correlation between Output and Trade Growth (1980-2017, quarterly) 0.6 US GDP:M US IP:M 0.4 KOR IP:M JPN IP:M KOR IP:X US GDP:X US IP:X KOR GDP:X 0.2 JPN GDP:M KOR GDP:M JPN GDP:X JPN IP:X 0-0.6-0.4-0.2 0 0.2 0.4 0.6 PRC IP:X PRC IP:M -0.2 PRC GDP:M PRC GDP:X -0.4-0.6 Corr (GDP/IP (+1),Trade) GDP = gross domestic product, IP = industrial production, M = imports, X = exports. 9
Trade measures continue to rise in Asia Trade-related Measures in Asia (cumulative) 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 2005 2010 2015 2017 Sanitary and phytosanitary rules Technical barriers to trade Tariff-rate quotas Antidumping measures Quantitative restrictions Special safeguards Notes: A stock approach is used wherein measures in force at the selected date are recorded. Measures in force are discounted from measures initiated, and measures withdrawn are discounted from measures in force. Source: ADB calculations using raw data from World Trade Organization. Integrated Trade Intelligence Portal (accessed July 2017). 10
Asia s value chain linkage with the global economy slowed Components of Gross Exports (%) 100% a: World 100% b: Asia 90% 90% 80% 66.5 67.1 67.0 80% 61.7 61.3 61.1 70% 70% 60% 2014 2015 2016 PDC RDV FVA DVA GVC partcipation rate 60% 2014 2015 2016 PDC RDV FVA DVA GVC partcipation rate DVA = domestic value added, FVA = foreign value added, RDV = returned value added, PDC = purely double-counted terms. Source: ADB calculations using ADB Multi-Regional Input-Output Tables, and methodology by Wang, Wei, and Zhu (2014). 11
Cross-border Investment 12
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2,500 2,000 1,500 1,000 World FDI inflows fell slightly in 2016, Asia is no exception Total FDI Inflows ($ billion) 500 0 FDI inflows to Asia FDI inflows to the rest of the world Source: ADB calculations using data from UNCTAD. 13
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Decline in FDI inflows mainly due to fewer M&A deals Number of FDI projects in Asia (thousands) 10 8 6 Value of FDI in Asia ($ billion) 700 600 500 400 4 300 2 200 100 0 0 M&A deals Greenfield FDI projects M&A deal value Greenfield FDI FDI = foreign direct investment, M&A = merger and acquisition. Note: Asia refers to the 48 regional members of ADB. Sources: ADB calculations using data from Financial Times. fdi Markets; and Bureau van Dijk. Zephyr M&A Database (accessed May 2017). FDI = foreign direct investment, M&A = merger and acquisition. Notes: The nominal value of many deals is not available due to confidentiality, especially for M&A. Asia refers to the 48 regional members of ADB. (accessed May 2017). 14
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ billion percent (%) Intra-Asia FDI increased while Asia s FDI from outside the region declined Intraregional FDI Inflows Asia 300 250 200 150 100 50 0 60 50 40 30 20 10 0 Central Asia South Asia Pacific and Oceania East Asia Southeast Asia Intraregional FDI share (RHS) Source: ADB calculations using data from ASEAN Secretariat, Eurostat, OECD, UNCTAD and national sources. 15
Asia s equity markets have become increasingly exposed to global shocks Share of Variance in Equity Returns Explained by Global and Regional Shocks (%) a: Pre-GFC Asia b: Post GFC Asia c: Post Normalization Asia Oceania Southeast Asia South Asia East Asia Central Asia 0 20 40 60 80 100 Oceania Southeast Asia South Asia East Asia Central Asia 0 20 40 60 80 100 Regional Global Oceania Southeast Asia South Asia East Asia Central Asia 0 20 40 60 80 100 GFC = global financial crisis. Notes: Pre GFC = January 1999 to September 2007. Post GFC = July 2009 to December 2015. Post Normalization = January 2016 to June 2017. Central Asia includes Georgia, Kazakhstan and the Kyrgyz Republic. East Asia includes the People's Republic of China; Hong Kong, China; Japan; the Republic of Korea; Mongolia; and Taipei,China. South Asia includes Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Southeast Asia includes Indonesia, the Lao People's Democratic Republic; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam. Oceania includes Australia and New Zealand. Asia includes Central Asia, East Asia, South Asia, Southeast Asia and Oceania. Sources: ADB calculations using data from Bloomberg; CEIC; World Bank, World Development Indicators (accessed July 2017); and methodology by Lee and Park (2011). 16
Regional impact on bond returns is increasing Share of Variance in Local Bond Returns Explained by Global and Regional Shocks (%) a: Pre GFC Asia Thailand Singapore Philippines Malaysia Republic of Korea Japan Indonesia India PRC Australia 0 20 40 60 80 100 b: Post GFC Asia Thailand Singapore Philippines Malaysia Republic of Korea Japan Indonesia India PRC Australia 0 20 40 60 80 100 Regional Global c: Post Normalization Asia Thailand Singapore Philippines Malaysia Republic of Korea Japan Indonesia India PRC Australia 0 20 40 60 80 100 GFC = global financial crisis, PRC = People's Republic of China. Notes: Pre GFC = January 2005 to September 2007. Post GFC = July 2009 to December 2015. Post Normalization = January 2016 to June 2017. Sources: ADB calculations using data from Bloomberg; World Bank, World Development Indicators (accessed July 2017); and methodology by Lee and Park (2011). 17
Subregional Initiatives on RCI 18
Subregional initiatives: Progress in 2016 CAREC - Progress in road and railway projects surpassed 2020 targets - 7 CAREC members ratified WTO TFA - Power interconnection projects on track GMS - Completion of 3 new bridges along GMS economic corridor - Major progress in GMS CBTA activities - Harmonizing regional power trade policy EAST ASIA - Pilot PRC-Mongolia joint customs control - Regional knowledge sharing on economic zones - Continuous support for CAREC TF program SASEC - Improved links in Asian Highway Network - Electronic cargo tracking system launched - Arrangements for energy trade forged PACIFIC - Endorsement of the Framework for Pacific Regionalism - Submarine cable projects - ICT enabled projects 19
Key Messages Regional integration shows large variations across subregions and six dimensions Regional integration in Southeast Asia is most advanced Trade and investment/regional value chains drive regional integration in Asia-Pacific Asia leading global trade recovery; but world trade growth remains weak Intraregional trade linkage strengthens even as Asia s global value chain participation is stagnating Global FDI inflows into Asia fell but intraregional FDI flows rise Asian financial markets and systems are still more integrated globally than regionally Equity market returns are more vulnerable to global external shocks Cross-border borrowing from banks has stabilized after significant unwinding process gone through in 2015 20
Thank you! 21