Tài liệu Bản báo cáo cùa World Bank về tình hình Đông Nam Á tháng 4 năm 2008 ppt

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East Asia:
Testing Times Ahead
East Asia & Pacific Update April 2008


Contents
ExecutiveSummary……………………………………………………………………………………………………………………… 1
Introduction………………………………………………………………………………………………………………………………… 5
Globalfinancialturmoil……………………………………….……………………………………….……………………………… 7
EastAsiandevelopments...acaseforguardedoptimism?……………………………………….………………… 11
Stronggro wthmoment umundercloudedskies……………………………………….………………………… 11
Financialli nkages:USturmoilaffectsEastAsiansecuritiesmarkets,notsomuchbanks……… 13 
Tradelinkages:WeakeningUSdemandoffsetbyothermarkets––sofar……………………………… 18
Volatilecommo ditypricesnowatthefor efrontofpolicymakersattention………………………… 22
EastAsianOutlook……………………………………….……………………………………….…………………………………… 29
CountrySections……………………………………….……………………………………….………………………………………  33
AppendixTables……………………………………….……………………………………….………………………………………… 53
KeyIn dicatorsTables……………………………………….……………………………………….…………………………………. 67 
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ThisRegionalUpdatewaspreparedbyMilanBr ahmbhatt,
LeadEco nomist,EastAsiaPREM,withthe
assistance ofAntonioOll ero,AlessandroMagnoli,,Cyru sTalatiandSung‐sooEun,drawingonin putsand
commentsfromcountryeco nomis tsandsectorspecialist st hrougho uttheEastAsiaandPacificRegionof
theWorldBank.Thereportwaspreparedunderthegeneralguidanceof
VikramNehr u,ActingChief
Economist,andJamesAdams,RegionalVicePresident,EastAsiaandPacificRegion.
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Executive Summary
ast year  Developi ng East Asia re corded its high est growth rate in over a decade (10.2
percent),cappingadecadeofimprovementsfollowingitshome‐grownfinancialcrisisin
1998.
1
Yetthis is hardlya timeforcel ebratio n,butrather one fo rc o ncer n.The global
economy is once again facing a testing time, with soaring fuel and  food prices,  on th e one
hand, and, on the  other, an unfolding sub‐prime crisis  emanating in the Unite d States and 
spreading to
other countries  and ass et classes, bringing in its  wake a plunging doll ar and a
slowdowninglob altradeandgr owth.
AlthoughEast Asi awill undoubtedlybeaf fected, itis reasonably well positione dtonavigate 
thiscrisiswi thoutincurringsignificantdamagetoitsprospects.True,muchde pe nds onhow
the crisis un fol ds,
 and of course, some countries in th e region will be a ffected more  tha n
others.But,broadlyspeaking,the region’sinvestmentinsoundmacroeconomicpoliciesand
structuralreformsov erthelastdecadehasadd edeconomicresili enceandflexibilitythatwill

helpdealwiththesechallengesoverthenex tyearortwo.
Foreignex changereservesareatall
time highs, non‐performi ng loans of banks have been  steadily lo wered, exte rnal and pub lic
debtburdensareataccep table levels,mostgov er nmentshave unusedfis calspace,thereal
economy has momentum, and diversification of trade and financial flows provides some
flexibilityinadjustingtothe
impendi ngglobalslowdown.
Yetthechallengesahead should notbe un derestimated.Thecrisi sinthe UnitedStates has 
deepened as asset prices struggle to find a new  equilibrium and financial institutions go
throughapai nfulpr o cessofde ‐leveraging and recapitalization.Further surprisescan not be 
ruledout.Previousex pe riencesof
reales tat epricebu stssuggestthe ycanlasttwiceas long
andtwiceas deepasequi t ypri cebu sts.Andthisisalso the firstfi nanci alcris isinthepost ‐
securitized world, in which most intermediation is done through securities markets not
depositar yinstitutions— which means itco uldtakeeven
longerto resolv e.Fortun ately,the
authoritiesoftheaffe ctedco u ntrieshave responded speedilytothecrisis ,loweri nginterest
ratesaggressively,providingfiscalstimulus,andusinginnovativeapproachestoinjectliquidity
and rescue failing financial institutions.But even if these interventions help stabilize the
financial system and prevent a downward spiral
in asset prices and asset values on balance
sheets, th e impact of the financial turmoil on  glob al growth, trade, and financial fl ows will

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1
DevelopingEastAsiacomprisesalllowandmiddleincomeeconomiesinEastAsia,includingChina,
Indonesia,Malaysia,Philippines,Thailand,Vietnamandanumberofsmallereconomiesincluding
PacificIslandeconomies.EmergingEastAsiareferstoDevelopingEastAsiaplusfourNewly
IndustrializedEconomiesorNIEs(HongKong,Korea,Singaporeand
Taiwan,China).

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East Asia: Testing Times Ahead
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undoubtedly be adverse, although the magnitude of the impending effects remains hi ghl y
uncertain.
This heightened uncertainty makes forecasting the impact on Eas t Asia a particularly
challengingtaskatthistime.Thelatestdatafromtheregionindicatesthatthemomentumof
output and  trade remains strong, but this is  hardly
surprising.The impact of a slowing US
economywill ta ketimetofeedthro ughtradingandfinancialchannelsand itsfullforcemay
onlybefeltinthesecondhalfofthisyear.Yeteveninthefirstcoup leofmo nths of2008,data
indicate adjustments in trade patterns that are
 suggestive of emerging trends that may
become more evident with ti me.For exam ple , export growth is  shifting from the United
Statestoothermarketsinindustrialanddevelopingcountries,encouragedbythede preci atin g
dollarandbycontinuedstrongmomentuminthedevelopingworld(includingEastAsiaitself),
aswell as
inEu rop e. 
In addition, the underlying trend in East Asia’sgr owthhas long been much higher than the
trend in  industrial country growth,  even as East Asian  cycles around that tre nd have often
been correlated with cycles in industrial coun tries, and ma y become more so as the re gion

continuestointegrate
withtheworldeconomy.Theregion’sstronglongrungrowthtrendis
not dr iven by  year to year fluctuations in worl d demand,  but, rather, by improvements in
productivity, innovation, quality control, education and skills.These underlying sources of
trendgrowthareunlikelytobeaffectedbythefinancialturmoilor
byaslowingglobalmarket
– suggesting that, with continued prude nt economic ma nagement, East Asia, and especially
China,cancontin ueto eme rgeas agrowt hpole in the worl dec onomy,pr ovidingaposs ible
counterw eigh ttotheslowin gindustrialeconomies.
Whilethesu b‐prim ecrisisinth eUnitedStateshashadr elatively
littledirectimpactonbanks
andfinancialinstitutionsinEastAsia,perha psthe most immediateand visibleimpact ofthe 
financialturmoilinthe UnitedStates hasbee nth esteep declineinsecuritiesmarketsacr oss
EastAsia ,espe ciall y equity and, to a lesser extent, offshorebo ndmarkets.This declinehas
beendri vennotjustbyuncertaintyandtheliquidatio nofportfolioholdingsofforeignfinancia l
institutions , but  als o by  a more realistic  re valuation of r isk  in  global financial markets  as a
whole and an adjustment in expe cted returns of the underlying in vestments.At the  same
time domestic credit — supported by
 ample domestic savings — continues  to provide 
resourcesforinvestment even asportfolioinflows and loans frominternationalbankstaper
off.Morew orryingwoul dbeifthedeclineinstock priceshadaconta gioneffectthroughth e
balancesheetsofcorporationsand/orbanks,oneamongthemanyfinancialsectorissues
that
theauthoritiesinEastAsiawillneedtokeepasharpeyeon.
Building on our analysis of expectedtrade and financialflow s, and the future course of key
economicvariables,wepro jectDev elopi ngEastAsi angr owth coul dde clin eby1‐2percentage 
pointstoaround8½percentin
2008comparedto2007.Whilesuch adeclineingrowthisa
matterofconcern,especial lyforthepoorinthesecountrie sforwhomeveryper centa gepoint
ofgrowthcounts,theresulting growthrate is stills ignificantandconsiderablyhi gher thanin

otherregionsofthedevelopingworld.Ofcou rse,
theUSfinancialturmoil coulds tilltakean 
unexpectedturnthatmayaffectthisoutlook—especiallyiftheco nt agionwereto spreadto
other industrial countries  in a major way — and this may require further downward
adjustmentsintheforecast.Butinsuchaci rcumsta nce ,thestrongfiscalsituation
inmos tEast 
Asiancountrieswillallowthemthespacetosoftentheblowbystimulatingdomesticdemand
throughtaxandpublicexpenditurepolicies.
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EAST ASIA & PACIFIC UPDATE
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Quite ap art from the  challenge of growth, the East Asian countries also have to deal with
current very high fuel and food prices.In virtually every East Asian country, inflation is
climbingtouncomfortablelevelsduetothesecost‐pushpressures,whilemonetaryandcredit
growthisdifficulttocontainowing
tosubsta ntialcapitalinflows.Somecountriesareresorting
to pricecontrols and otheradministr ative measures to temporaril ycurb  inflation, but these
onlydistortmarketsignalsandencourageblackmarketsoverthelongerterm,andeventually
havetoberemoved.Inot hercountries ,fuelsubsidieshaveclimbedtothe pointwhere
they
arebecomin galargefiscalburden.
Dealing with high food and fuel prices probably constitutes a greater challenge to
governmentsinEas tAsiathanthe financialturmoilintheUni tedStatesandaslowingglobal
economy.Inthemediumterm,theanswerclearlyliesingreaterfuelefficiency,strongerand
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moreproductiveglobalagricultureandanopeninternationaltradingsystem.Butintheshort
term,thebiggerconcernistoalleviatetheharshburdenthisimposesonthepoor.True,some
economiesinth eregionarenetexportersofthesecommodi tiesandsoare enjoyinggainsin
overall nation al income.
And true, hig her food prices do help farmers – although small
farmersareusuallynetconsumersoffo odandarethushurt.Butthenon‐farmpoorlivingin 
ruralandurba nareas(andsmallfarmers)—whodevot ebetwee nathirdtotwo‐thirdsoftheir
expenditures tofo od—
are s eeingtheirre al incomes de cli nes ubs tantiallyas aresultof the
increaseinfo odprices.Simil arly,wh ilehig herfuelpri cesaffectever yone ,thepoorarehurt
disproportionately.Alth oug hthi sdifficultpr oblemhas neithereasyanswersnora one‐size‐
fits‐allsolution,EastAsiahasfacedthesechallengesbefore
andadoptedavarietyofsolutions
inth epast tofitdifferentcircumstances,rangingfromtargetedsubsidiestoconditionalcas h
transfersto school lunch programs.These programs now need to be considered aga inand
reintroducedbeforethepro blembecomesto oacute.




4
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East Asia: Testing Times Ahead


 


Introduction
espitefall inggr owthinex portsto the US,risingvolatility in globalfinancialmarkets, 

highandvolatileinternationalcommodityprices,andanincreasinglycloudedoutlook
forthewo rldec onomy,economicac tivityin mostEastAsian economiescontinuedat
strongratesthroughthe endof 2007andintoearly 2008.Fortunately,the
co untriesof East
Asia are generally better prepared than ever to deal with the vicissitudes of the global
economyinthismoreunc ertaintime.ReflectinglessonslearnedfromtheEastAsianfinancial
crisis of a dec ade ago, to da y most eco nomi es in the  region have st rong external payments
positions and large
international reserves, prudent fiscal and monetary policies, better
regulatedbankingsystems,andprofitableandcompetitivecorporations.EastAsia’stradeand
financialrelationswiththerestoftheworldhavebecomesteadilymorediverse.Theregionis
becomingmoreofagrowthpoleintheworldeconomy,provingtobeaforce
forstabilityata
timewhentheindustrialeconomiesareslowing.
ThisisnottosaythatEastAsiaisimmunefromdevelopmentselsewhere.Onthecontrary, its
increased integrationintheworld’s trading and financial systemmakesit sensitive to global
economic condition s. Whether the un folding turmoil in US 
and other financ ial markets  will
gatherforceorstarttoabate,andhowlargeitsimpactsonworldeconomicactivitywillbe,is
still uncertain. On balance, however, the financia l turmoil has substantially increased the
likelihoodof aUSrecessi onandasignifi cantslowdowninworldgrowth in2008,includingin

EastAsia.Economiccyc lesinEa stAsia ha veindeedoften beencorrelatedwithcycles inthe
industrialcountries.Butth esehavegenerallybeencyc lesaroundanEastAsiantre ndrateof
economicgrowththathasformanydecadesrunat4–5.5percentage pointsfasterthantrend
growthinindustrialcountries.
Hightrendgr owth hasbeendrivenbyfundamentalfactorssuch
as robust productivity gains, ability to absorb knowledge from abroad, high savings, and
growing education and skills. And these fundamentals are unlikely to be displace d by the
presentfinancialturmoilandcyclicalslow down.

Looking forward, grow th in Developing East  Asi a in
 2008 is expe cted to  co me do wn fr o m
2007’s exceptional pace of over 10 perc ent by a hefty 1.5 percentage points. Nevertheless,
thatdeclines tillwouldleavere gionaloutputexpandingbyahealthy8.5pe rce ntorso (table
1). GrowthinChina isex pect edto comedown by2 fullpercentage
pointsto9. 4percent.A
furtherslowinginexportgrowth willlikel ybealeadingelem entintheimpendingEastAsian
slowdown.Oneofthe striking features of the past six monthshasbe enhow modestly East
Asianexportshavedecelerated,asweakerexpor tstotheUSbyhavebeenoffset
byincreasing
exports to Europ e, other East Asian economies, and––a notable development––surging
exports to other developing regions , especially those benefiting from high oil prices. It is
D



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6
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East Asia: Testing Times Ahead
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 
nevertheless likely that exports will turn
lowermore distinctlyincomingmonths,
as US impor ts themselves begin to fall
(rathertha nmerelygrowingmoreslowly
or stagnating),  and as  the US downturn
and financial market turmoil begin to
affectmoredecisivelyot herre gionsthat

areEastAsianexportmarkets.
The US
 financial market turmoil has
alreadyled to increased volatilityinEast 
Asian equities markets and to rising
offshorebondfina ncingco sts .Howe ver ,
given that lending  by dom es tic banks––
the main source of financing in the
region––has been little affected so far,
the impact of these developments on
domestic activity may be
 limi ted. Rising
oil, metals, and food prices will also
impose alossofincomeonEastAsiaofperhapscloseto1 percentofGDP. (Of course,the
region contains a number of net commodity‐ex porti ng economies that will enjoy gains in
nationalincomeduetohigher commodityprices.)Risi ng
foodpricesareexa cerbatinghe adl ine 
inflationandhurtingtheincomesofthepoor.Thes edevelopmentscoul dstallorevensetback
the progress made in reducing poverty over the last decade while heightening political
tensions.
The task of macroeconomic management in this environment will not be an easy one,
although policy
‐ makers  in mo st East Asian countries will be  able to  confr ont the problems
fromarelativelystrongpositi on. 
Current account surpluses and large foreign reserves provide a buffer that will enable
economiesto accommodatevolatilityininternationalcapi tal flo wswithoutforcingthekindsof
sudden large  ad justments in domestic demand
that bec ame inevitable during the 1997 –98
financial crises. Fiscal positions generall y also have become stronger over recent years,
creatingthesco peformorestim ulativefiscalpoliciesshoul danun expectedfall‐offin private

sectordomes tic makethemdesirable.
The role of monetary policy is likely to be especially challenging. In principle,
 the rise in
headline inflation caused by higher international commodity prices should be temporary,
reflectingachangeinrelativepricesthat,byitself,doesnotcallforactionbythecentralbank.
However,monetarypolicywillneedtorem ainvi gilanttoensurethattheriseinfuel,food,and
other
commoditypri cesdoes notset off an inflationary spiralleadingto ri singcorein flation
rates,especiallyineconomiesalreadyshowingsignsofdomesticover‐heatingandexcessively
rapid credit growth. Continued movements toward greater exchange rate flexibility will
provide countries  greater fl exi bility in  us in g monetary  policies to meet inflation challenges.
Countries
alsofacedif ficul tchallengesinaddr essingthehar mful distributionaleffectsofhigher
foodandfuelprices onthelivingstandar dsofthepoor. Well‐targetedcashtransferschemes
may be helpful, although they need to be considered within the context of the country ’s
overallfiscalposition.
Table1.East Asiaeconomicgrowth
 2006 2007 2008 2009
Emerging EastAsia 8.4 8.7 7.3 7.4
Develop.E.Asia 9.8 10.2 8.6 8.5
S.E.Asia 5.5 6.1 5.6 6.0
Indonesia 5.5 6.3 6.0 6.4
Malaysia 5.9 6.3 5.5 5.9
Philippi nes 5.4 7.3 5.9 6.1
Thailand 5.1 4.8 5.0 5.4
TransitionEcon.    
China 11.1 11.4 9.4 9.2
Vietnam 8.2 8.5 8.0 8.5
SmallEconomies 7.2 6.6 6.4 6.1
NewlyInd.Econ. 5.6 5.6 4.6 5.0

Korea 5.0 4.9 4.6 5.0
3otherNIEs 6.1 6.2 4.6 5.0
Japan 2.2 2.1 1.5 2.0
Source:WorldBankEastAsiaRegion;March
2008ConsensusForecastsforNIEs.

Global Financial Turmoil
heturmoilintheUSsub‐primemortgagemarketthatbegan lastAugusthascontinued
to br oaden  and i ntensify, leadi ng to a tighteni ng in global credit markets and failing
financial institutions – most dramatically with the collapse of the Bear Stearns
investmentbankinmidMarch2008.Howthiswillplay
outanditspotential effectsonworld
economic growth, tra d e and  fin ancial fl ows is  one  of the two  or  three major uncertainties 
facingeconomicpolicymakersinEastAsia atpresent.
Theroots ofthecri sisar eta ngledbut one certainly liesinthe longboom inth eUShousing
marketthatcameto anendin200 6.Onecategoryof loansthathadexpandedrapidlysi nce
themid‐1990s wasUSsub‐primemortgages—mortgagesowedbypeoplewitha riskycredit
profile or mortgages that are to o large to be eligible for reinsurance through government
backed mortgage agencies.Issuance of
 such mortgages surged in the latter years of the
housingboom,in2004‐2006inparticular.
Housepricesbeganfallingfrommid2006,whiletherateofdefaultsonsub ‐primemortgages
soared(figur e1).Byearly2007 therateofseriousdelinquenciesonsub‐primemortgageswith
adjustable interest
rates climbed to  11  percent,  about double th e rate in  mid‐2005. These
risingmortgage delinquencieswerethetriggerforavirtual collapseinthepriceofmortgage
backedsecurities insecondar ymarkets thatbe ganinthethird quarteroflastyear.Lehm an
Brothersestimatesthatlossesontheexistingstock
ofmortgagescouldtotal$250billionwith
a 15 percent housing price decline.Greenlaw, Hatzius et  al (20 08) estimate that mo rtgage

creditl ossesonthecurre ntstock ofmor tgages couldtotal$400billion.
2
 They estimatethat
losseswillbesplitroughlyhalfandhalfbetweenUSandforeignleveragedinstitutionssuchas
investmentbanks,commerci albanks,andhedgefunds.
Asecondbroadsetoffactorswerefinancialinnovationsinthe1990sand2000swhich,while
they have played a key role in promoting
deep and more efficient capital markets and
providing instruments for trading and spreadi ng risk, have also been instrumental in
transmittingtheshockofrising delinquenciesin th emo rt gagemarketmorebr oa dlythrough
the financial system. One of these is securitiz ation, which involves the transformati on of
illiquidassetslikemortgageloansinto
securiti esthatcanbetradedincapitalmarkets. Another


2
DavidGreenlaw,JanHatzius,AnilK.Kashyap,HyunSongShin.(2008).“LeveragedLosses:Lessons
fromtheMortgageMarketMeltdown.”USMonetaryPolicyForumConferenceDraft.(February29).
T
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
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East Asia: Testing Times Ahead
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isthedevelopmentofnewrisktransfer

instruments tha t have allowed market
participantstoslicetherisksembedded
in traditional financial instruments and 
trade them separately, thereby
allowingtheseriskstobespreadacross
alar genu mb erof marketparticipants.
A sizeable proportion of sub‐prime
mortgages were  securi tized in
collateralized
 debt obligations (CDOs )
and found  their way onto the  balanc e
sheets of banks, investment funds or
‘structured investm ent vehicles’ (often
affiliates of banks) andinstitutional
investors such as pension funds,
insurance companies, and individuals
worldwide. It is estimated that at the
time the crisis started sub‐prime
securitiesmadeup
some15‐20percent
of total CDOs, which, in turn, wer e
estimated toamountto US$ 1 trillion
in the US and US$ 1.5‐2.0  trillion
worldwide.
Rising mortgage delinquencies would
certainly  have hurt th e balance sheets
of mortgage lenders in any case, but,
withsecuritization,market p articipants
havefoundit
difficultto estimate‘who

holds what’ and  the magnitude of the
exposure to risk of different financial
institutions.Hei ghtene d uncertainty
thenledtonegativespilloversandafall
in prices of a broader  set of
instruments such as CDOs, mortgage
backed securities, jumbo mortgages
and asset backed commercial paper,
imposing
further balance sheet  losses.
Risinguncertaintyaboutthedistributionofl o ssesandthecreditworthinessofborrowersalso
contribu tedtoa sharp rise in spreads and adryi n g of credit in a number of key short term
fundingmarketssuchastheinterbankmarketandtheassetbackedcommercialpapermarket.
Reflecting
thefundingsqueezeintheinterbankmarket,thespreadbetweenthe 3monthUS
dollar LI BOR rate (at which banks lend to each other) and the OIS rate (a me asure of the
expectedovernightfederalfundspolicyrate)surgedfromlessthan15basispointsonAugust8
2007at
over50onAugust10andover90basispointsbymidSeptember.AsFigure2shows,
theLIBOR‐OISspreadhas remainedhigh,surgingwhenevernewwavesofconcernaboutth e
creditwort hine ssoffinancialinstitutionsaffectthemarket.EurodenominatedLIBORspreads
havealsowidenedsharply.
Figure1.S&P/Case‐ShillerComposite HomePriceIndex
(Jan.1987–Jan.2008)
0
50
100
150
2
00

2
5
0
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07

Source:Bloomberg,Datastream.

Figure2.Termliquidityspreads:3‐monthLibor/3‐monthOIS.
Jan.2007–Mar.2008
0
20
40
60
80
100
120
Jan-07
Feb-07
Mar-07
Apr-07

May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
US dollar
Euro
basis points

Source:Bloomberg,Datastream.




9
EAST ASIA & PACIFIC UPDATE

 
Athirdfa ctorin theamplificationandspreadofthecr isisistheprocessofpro‐cyclicalact ive
balancesheetmanagem entbyleveragedfinancial institutions.Whenthevalueofassets  in
balancesheetsaremarkedtomarket,ariseinthepriceofassetsheldbyfinancialinstitutions
will be reflected
 in an increase in their net worth.Withactivebalance sheet management,
banks then borrow  more (to  maintain a target ra tio between  leverage and net wor th) and

acquiremoreassets,whichtendstopushassetpricesupevenmore.When–astoday‐asset
pricesare falli ng,thismultipliergoes 
intoreverse.Aslever agedinsti tuti onssuffer loss eson 
their assets their net worth falls and  they are obliged to pay down th eir borrowin gs,which
theydobysellingassets.Thispushesdownassetprices,whichfurtherdamagestheassetside
ofbankbalancesheets.
Greenlaw, Hatzius et al (2008) suggest that
 is the active balance sheet management and
develera ging pr oc esswhichexplai nsth eprogressive broadeningof cl assesof assetsaffected
bypricedeclinesandtighteningcreditconditionsinlate2007andearly2008,includingwider
classesofmortgageloans,corporatedebt,sovereigndebtandequities.Thesedevelopments
haveresulted,overall,in
asignificanttighteningofcreditavailability,especiallyinth eUSand 
the Euro Area.How far could the delever agin g proc ess go? Under a plausible scenario,
Greenlaw,Hatziusetal(2008)calculatetha tbalancesheets ofUSfinancialins tituti onscould
contractby$1.98trillion.Theyestimatethatthis,inturn,couldreduce
GDPgrowthby1‐1½
percentag epointsover thecourseof ayear. 
The Federal Reserve has undertaken a series of strong and innovative actions aimed at
maintaining the liquidity of leveraged financial institutions and the flow of credit in the
economy– slashing thebenchmark interest rate to
just over2percent,wide ningtheasse ts
againstitiswillingtolendtoincludemortgagebackedsecurities ,andall owingawidersetof
financialinsti tutionstoborrowdirectlyfromitsdiscountwi ndow.Buthowsuccessfulthe se
actions will be in staunc hing the  cri sis in cr edi t markets is not  yet cl ear.
There is now an
unusuall yhighlevelofuncertaintyaboutth eeconomicoutlook,giventh evastinnovationsin
financial ma rkets ov er the past decade and th e as‐yet poor un derstanding of the new  and
complex linkages within the post‐securitization financial system and between the fi nancial 
systemandthereal

economy.
Given the high level of uncertainty
surrounding the global outlook we
haveassumedaninterimscenariowith
a range of outcomes for the external
environment facing East Asia rather
than point forecasts.(Table 2).This
scenario sees gr owth in th e industrial
world in 2008 slowing from 2007 by
roughly1.0
‐1. 5per centa gepo ints ,with
the sharpes t slowdowns fro m 2007
occurring in the US and Europe, the
two areas most seriousl y affected by
thefi nancial turmoil.
Table2.InternationalEconomicEnvironment
 2007 2008 2009
GDPGrowth(%):    
World 3.6 2.4–2.8 2.8–3.2
HighInc omeOECD 2.5 1.1–1.6 1.4–2.0
USA 2.2 0.5‐1.4 1.0 ‐2.0
Euro‐zone 2.7 1.3‐1.7 1.5‐1.9
Japan 2.1 1.3‐1.7 1.6‐2.0
Worldtrade(%) 7.5 4.0–5.0 5.0–6.0
Oilprice($/bbl) 71.1 80‐90 80‐90
Non‐oilcommodity 15.8 10‐20 ‐10‐0
WorldBankEastAsiaandPacificRegion.
Interimsc enari oMarch2008.





10

East Asia: Testing Times Ahead


 


East Asian Developments …
A Case for Guarded Optimism?

STRONG GROWTH MOMENTUM UNDER CLOUDED SKIES

Developin gEast AsianGDPgrowthreached10.2percentin2007,thehighestsi ncetheearly
1990s.Growthgenerallycon tin uedatstrongratesinthethirdandfourthquartersoftheyear,
despitegrowin g concer ns about the potential impactsofthe financial turmoil in the United
States.GrowthinChinaexceeded
11percentthrougho uttheyear,easingonlygraduallyover
the cours e of the  ye ar as  moderating ex port gro wth was mostl y of fset by ri sing domestic
investment and consumption growth.Low income economies such as Cambodia, Lao PDR,
MongoliaandViet namalsocontinued to see strong growthina 7‐10pe r cen trange
 for the
thirdorfo urt hyearinsuccession.
Mostmiddleincomeco untries inSo ut hEastAsia enjoyed an increase inthepace ofoutput
growth over the course of 2008 (Figure 3),  generally on  the basis of accelerating domestic
demand. Rising remittances flows in the Philippines sup ported robust c o nsum pti on growth, 
while recent improvem ents in the fiscal position allowed a str ong increase in public
infrastructure spendi ng.Gr owth in Indonesia  accelerated to a 10 year high of  6.3 percent, 

principall yonthebasisofboomingprivateinvestmentandconsumption.Runni ngcounterto
there gi onaltrend,private consumptionandinvestmentinThai landwerege nerall y
weakfor
much of the year because of unsettled political conditions, but growth still came in at a
respectable4.8percentbecauseofresilientoverallexportgrowth,despiteweakerexportsto
the US and a 9 percent appreci atio n of the baht against the dollar.Growth in Thailand
acceleratedtoan
unexpectedlystrong5.7percen tinthefourthquarterbecauseofalateyear
surgeinexportstoEurope,Japan,therestofEastAsiaand–reflectingatrendacrossEastAsia
–inexportstoot herdevelopingregionsan dcountries,es peci allythosebene fitingfromhigh
oilpri ces,suchasthe
MiddleEast andRussia.
Growthinmostofth ehi ghincomeNe wl yIndustrializedEconomie s(N I Es) in there gionalso 
pickedup to anav er agepaceofaround6percentinthesecondhalfof 2007, supportedby
robustco ns um ptio ngrowthandunexpectedstrength in ex ports. Real growthinexpor tsof 
goods and ser vices in  Taiwan (Chi na) and Korea  acc elerated to  13 percent and  16 perc ent




12

East Asia: Testing Times Ahead


 
respectively in the  fourth qu arter, for ex am ple.Sin gapo re however saw year  on ye ar GDP
growthdeceleratesharplyfromcloseto10percentinthethirdquartertojustover5percent
in the fourth because of falling manufacturing sector growth. Fourth quarter output
contracte d at a seasonally adjusted annual rate of

‐4.8 percent from the third quarter,
contributingtothedownturninquarteronquartergrowthofNIEsasagro upshowninFigure
4.Singa pore’sMinistryofTr adeandIndustryobservedthatthefallreflectedasharpdeclinein
biomedical manufacturingratherthantheimpactoftheslowingUSeconomy.
Figure3.East Asia–QuarterlyGDPGrowth(%ChangeYearAgo)
Q1 1999
Q3 1999
Q1 2000
Q3 2000
Q1 2001
Q3 2001
Q1 2002
Q3 2002
Q1 2003
Q3 2003
Q1 2004
Q3 2004
Q1 2005
Q3 2005
Q1 2006
Q3 2006
Q1 2007
Q3 2007
-3.0
0.0
3.0
6.0
9.0
12.0
E. Asia NIEs

SE Asia China

Source:WorldBankda taandstaffestimates. 

Figure4.East Asia–QuarterlyGDPGrowth
(%ChangeQuarterAgo,SAAR)
Q1 2001
Q4 2001
Q3 2002
Q2 2003
Q1 2004
Q4 2004
Q3 2005
Q2 2006
Q1 2007
Q4 2007
-3
0
3
6
9
12
1
5
NIEs
SE Asia

Source:WorldBankda taandstaffestimates. 





13
EAST ASIA & PACIFIC UPDATE

 
FINANCIAL LINKAGES: US TURMOIL AFFECTS EAST ASIAN
SECURITIES MARKETS, NOT SO MUCH BANKS

ThemostobviouseffectsoftheUSfinancialturbulenceonEastAsiahavebeensharpdeclines
inEastAsianequitymarkets.Risinguncertaintyandriskaversionhavealsopushedspreadson
sovereign and private offshore borrowings higher. A number of economies experien cednet
portfoliooutflowsinthelatterpartof
theyear,areversaloflargeinflowsearlierintheyear.A
number of banks in the region have written off losses on US sub‐prime mortgage‐related
assets, althoughtheim pacton overall bankin gsystem profits and balance sheetshassofar 
been small. However, it remains to be seen
 what additionallossesbank sin the region may
experienceastheUScre ditmarketturmoilaffectsawidenin garrayofassets.
ThemacroeconomiceffectsofUSandglobal
financial volatility and associated financial
sector losses in East Asia seem relatively
limited.Thisas sessmentcouldch angeif the
global credit market
turmoil intensifies in
coming months in  ways tha t more se verely
affect domesti c financial systems in East
Asia.At the broad macro level, most of the
region’s larger economies are running large
current account surpluses an d have sha rply

reducedtheirnetexternalliabilitiesoverthe
lastdecade.EastAsiais alarge
netsupplier
offundstotheglobalfinancialsystemrather
than a borrower. In 2007 net current
accountsu rplusesto taled closeto9pe r ce nt
of regional GDP (or a median 7.4 percent
among the  9 largest economies), while  net
capital inflows were worth an additional
percentag epointofreg ional GDP
(figure5).
In many economies, lower private capital
inflows actually will reduce the monetary management and exchange rate appreciation
pressuresthattheircentralbankshavebeen grapplingwith.Mostbusinessinvestmentinthe
region continues to  be financed from internal ea rnings or  domestic bank borrowing , where
thereisthusfarlittle
signofadomesticcredit crunch.Thiscouldchangeifbankssufferbigger
lossesonforeignmort gage ‐relatedasse tsthanhavebeenexpose dthusfar.

Equity markets sell off

Looking at so me of the se financial linkages and im pacts in more detail,  equity prices in the
major economies have fall e n a median 19 percent between their peak (generally October
2007)andearlyMarch2008.ThesteepestfallswereinChina,HongKong,thePhilippines,and
Singapor e,andsmallerdeclinesin
Indonesi aandThailand(figure6).Themajorfactorsbehind
theequitypricedeclinesar ehe ightene duncertaintyabouttheglobaleconomicoutlook,ris ing
riskaversion,andasignificantpullbackinportfolioequityandbondflowstoemergingmarkets
Figure5.East Asiabalanceofpayments.1997–2007
-4.0

-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1997 1999 2001 2003 2005 2007
Current account
Capital account

Source:WorldBankda taandstaffestimates. 




14

East Asia: Testing Times Ahead


 
afterthestartoftheUSfinancialturbulenceinAugust2007.Inmostcases,though,therecent
pricedeclinesarebutapartialreversalofpreviouslargeandprobablyunsustainableincreases
betweenthe end of  2006 and October 2007 .In some cases, pric e‐earnings (PE) ratios have
comedownfromprobably
excessivetomorerealisticlevels.Forexample,thePEratioonthe
IFC’sChinainvestibleindexfellfrom43inOctober2007to28inJanuary2008.
Initialpublicofferi ngs(I P Os)in 
regional financ ial ce n ters su ch

as Hong Kong and Singapore 
have plumm ete d. IPOs in
Singapor e totaled only $24
million
in the first 6 weeks of
2008, down from $283 million
in the same period of 2007.
3

Equity markets play a
significant role in corporate 
finance in the high‐income
economiesofEastAsiasuchas 
Hong Kong,  Korea, and
Singapor e. Ho wever, equity
markets are less important in
most of  the  developin g
economies, for which internal
corporate earnings and ban k
lending are more important
sourcesoffinancing.



3
BusinessWeek,“Asia’sIPOsHitbyaDrought,”February22,2008.
Figure6. Equity MarketIndexes
(Jan.2004(=1)toMarch2007)
0.5
1.0

1.5
2.0
2.5
3.0
3.5
4.0
Philippines Singapore
Hong Kong China
J
an-2004
Apr-2004
Jul-2004
Oct-2004
J
an-2005
Apr-2005
Jul-2005
Oct-2005
J
an-2006
Apr-2006
Jul-2006
Oct-2006
J
an-2007
Apr-2007
Jul-2007
Oct-2007
J
an-2008



0
.5
1
.0
1
.5
2
.0
2
.5
3
.0
3
.5
4
.
0
Indonesia
MalaysiaThailand
Korea
Jan-2004
Apr-2004
Jul-2004
Oct-2004
Jan-2005
Apr-2005
Jul-2005
Oct-2005

Jan-2006
Apr-2006
Jul-2006
Oct-2006
Jan-2007
Apr-2007
Jul-2007
Oct-2007
Jan-2008

Source:HaverAnal ytics.




15
EAST ASIA & PACIFIC UPDATE

 
Offshore bond financing costs rise

Spreads foroffsho reborrowing
also have  widened  s ignificantly
for both sovereign and other
borrowers (figure 7). Spreads
moved from exceptionally low
levels of approximately 140
basis points in mid‐2007 to
approximatel y 270 and 320
basis points by early March

2008 for Philippines and
Indonesia, respectively.
Nevertheless, the latter remain
well below historical levels in
the early‐mid 2000s and also
well below spreads in  US high‐
yield debt markets. Spreads
also have moved higher for
China, Malaysia, and Thailand.
However, appropriately for
countries with much  lower net 
externaldebt ,,at100–150basis
points, their spreads remain
considerably lower than those

of Philippines and Indonesia.
4

The iTraxx Asia ex‐Japan Credit
Default Swap (CDS) Index
measures how the cost of
offshore financin g has
increasedforabasketofissuers
that includes East Asian banks
and non‐ban ks as well as
governments (figure 8). The
premium on such contracts
surged almost 300  basis points
between mid‐
2007 and early

March 2008, a much larger
move than for spreads on
sovereignsalo ne.



4
Indeed,foreignreservesheldbyChina,Malaysia,andThailandexceedtheirtotalstocksofexternal
debtbysignificantmargins.InIndonesiaandPhilippines,foreignreservesstandat30percent–40
percentoftotalexternaldebt.
Figure7.Emergi ngMarketSpreads(Jan.2001–March200
J
an-
2001
Jul-
2001
J
an-
2002
Jul-
2002
J
an-
2003
Jul-
2003
J
an-
2004
Jul-

2004
J
an-
2005
Jul-
2005
J
an-
2006
Jul-
2006
J
an-
2007
Jul-
2007
J
an-
2008
0
200
400
600
800
China
Malaysia
Indonesia
Philippines
Thailand
Source:JP Morgan EMBI+;WorldBankdata.


Figure8.iTraxxAsiaex‐JapanCDSIndex
(Premium(bid)inbasispoints)
0
50
100
150
200
250
3
00
3
50
09/20/2006
11/20/2006
01/20/2007
03/20/2007
05/20/2007
07/20/2007
09/20/2007
11/20/2007
01/20/2008
03/20/2008

Source:Da tast ream. 




16


East Asia: Testing Times Ahead


 
…but domestic credit conditions little affected

How fully rising of fshor e spr eads are  refl ecte d in domestic borrowing costs remains to be 
seen. In Indonesia, yields for dom estic governmen t borrowing  have risen fr om le ss than 9
percentinmid ‐2007 to over10percent in early2008.Asregardspriva tesectorborrowing,
however,retainedearningsanddomesticbank
borrowingremainthemostimportantsources
ofexternalfinancingforfirmsinmostofdev el opin gEas tAsia.Hereitisdifficulttoseeobvious
signs of bank credit becoming more costly or  harder to obtain. Average bank lendi ng rates
generallytrendedlower orwerebr oa dlyflat throughtheendof2007,
trac kingthetr e ndof 
policy interest rates (fig ure 9). Bank lending rates trended highe r in China, but again this
reflected the gover nment’s policy of tightening monetary policy to avert the danger of
economic overheatingand higherinflation.Growthin bank credit to the private sector was
acceleratingstronglyinChina,
HongKong,Indonesia,andSingap oreinlate2007orearly2008,
whilerunninginlinewithtrendsof recentyearselsewhere(table3).
Figure9.BankLendingRates(%)(January2006‐Februar y2008)
5
6
7
8
9
10
11

12
0
2
4
6
8
10
12
14
16
1
8
China
Malaysia
Philippines
Thailand
Indonesia (RHS)
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-08
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07


Source:IMFIFSandWorldBankdata.

Table3.Bank Creditto PrivateSector(%changeyearago)
 2003 2004 2005 2006 2007*
China 20.8 11.2 9.2 14.3 19.3
Indonesia 21.1 33.0 24.8 12.5 22.4
Malaysia 6.8 6.6 9.2 6.9 11.2
Philippines 1.1 9.3 ‐2.2 7.4 1.9
Thailand‐1.3 11.3 7.7 4.0 4.6
HongKo ng ‐2.8 3.7 6.0 1.8 12.4
Korea 8.9 1.3 7.4 14.5 12.4
Singapore 5.4 4.4 2.0 4.9 17.6
So urce :IMFI nter nati onalFinanceStatistics.
*Latestavaila bleinlate2007orearly2008.




17
EAST ASIA & PACIFIC UPDATE

 
Impact on East Asian bank balance sheets seems limited so far – but needs monitoring

HowwellEastAsianbankscontinuetoperformtheirintermediationandotherkeyeconomic
functions also will depend on the quality of their balance sheets. This introduces another
potential channel through which the US creditmarketcrisis could affect EastAs ianfinancial
systems by damaging the quality of assets on
bank balance sheets. Measures of non‐

performing loan ratios and capital adequac y in  the  larger  economies ge nerally continue to 
show improvements  (figure 10).  Nevertheless, past experience shows that underlying
deteriorati oninbankassetqualitycanremainobscuredduringaperiodoffastgrowthsuchas
EastAsiahasexperie ncedinrecent
years.
Initialassessmentsbyregulators,creditratingagencies,andinvestmentbankssuggestedthat
emerging East Asian financ ial sector expo sure to  US sub ‐prime‐related assets was rel ativ ely
limited.Suchexposurewasconcentrated insomemore develop edfi na ncial markets suchas 
KoreaandSin gapore ,aswellasinChina,andin
afewinstitutionsineachcountry:WooriBank
inKorea,DBSinSingapore,and BankofChinaandIndustrialand Co mmercialBa nkofChina.
Indeed,Chin aisthelarg estoverse asholderofUSmortgage ‐backedsecurities–– approximately
$260 billion––mostly through the central bank ’s international reserve holdings and also
through holdings of  commercial
 banks. However, mo st of  th ese holdings are backed by US 
governmentagenciessuchasFannieMaeandFreddieMac.Amongcommercialbanks,Ban kof
Chinadisclosedanexposure of$7.95billioninassetsrelatedtoUSsub‐primemortgagesatthe
end of Septem ber2007.AttheendofDecember,
these assets had been reduced to$4.99
billion,against whichthebank booked charges of$1.3billion.Never theless,Ba nkofChina’s
netprofitsroseanunexpectedlystrong31percentto56.3billionyuan($7.99billion)in2007.
This increase came despite the write‐off on sub‐primeasse tsdrivenby strong
 loan volume,
higherinterestmargins,andsurgingfeeandcommissionincome(the latter drivenbytherapid
developmen tofChi na’sdomesticcapi talmarket).
Figure10.EastAsianon‐performingloanratios,2002–07
0.0
5.0
10.0
15.0

20.0
25.
0
Dec 2002
Dec 2003
Dec 2004
Dec 2005
Dec 2006
Dec 2007
China
Indonesia
Korea
Malays ia
Philippines
Thailand

Source:WorldBankda taandstaffestimates. 





18

East Asia: Testing Times Ahead


 
Finally, there is  also a ris k that ba nks in emergi ng ma rkets could suf fer li quidity or f undi n g
problems on the liability si de of the ir balance sheets if the tu rmoil in  global credit markets 

causes international banks  suffering large losses on mortgage related assets to begin
liquidating their loans to emerging market banks.
5
 However, Bank for International
Settlemen ts (BIS ) data suggest that external borrowings by banks in so me of the  main East
Asiandevelopingeconomiesareconsiderablylowertodaythan,forexample,beforethe1997
financialcrisis.ThaibankliabilitiestoBISre porti ngbanksst oodatapproximately9percentof
GDPinlate
2007,forexample,compare dto48percentofGDPinJune1997.EastAsianbanks
alsohav ebu iltupth eirownloansanddeposits withinternational banks. Thus,for exam ple,
whilePhilippinebanks’net borrowing sfro minter nationalbankswere 8.4 percentof GDPin
June1997,theywer e‐4. 4percentof
GDPinSeptember2007,thatis,anetcreditposition.
Overall, theinitialassessmentofrelativelylimitedspilloversfromtheUScreditmarketturmoil
ontotheEastAsianfinancialsectorappearstobeholdinginearly2008.However,itwillneed
tobecloselymonitoredandre‐ev alua tedasthe
creditmarketturmoilintensifiesandsp reads
fromstartingpointofsub‐pri memort gages toaf fect increasinglywiderclassesofassets.

TRADE LINKAGES: WEAKENING US DEMAND OFFSET BY OTHER
MARKETS – SO FAR

Although exports from a number of
economies were showing unexpected
resilience and revival late in 2007 and
early 2008, gr o wth in East Asian expo rts
asawholeeas edlowerove rthecourseof 
2007. In US$ terms, Emergi ngEa stAsian 
exportsslowedfromyear‐on‐yeargrowth 
of approximately 22

percent in January
2007 to 15 percent–16 percent in the
third quarter. Expo rt growth eased in
China as well as in the Sou th East Asian
middle‐incomeeconomiesandthenewly 
industrialized economies (NIEs) (figur e
11).Mo rerecently,th ough,areboundin
export growth in South East Asian
economiesincl udingIndonesia,
Malaysia,
and Thailand and in NIEs such as Korea
and Taiwan (China) has pushed overall
regionaldollarexport growth backup to
18percent–19percen t.



5
TheWorldBank’sforthcoming“GlobalDevelopmentFinance2008”reportstudiesthislinkagein
moredetail.
Figure11.EastAsiaExportGrowth (US$3mo.avera ge‐ %
changeyearago.Jan.00‐Jan08)
-10
0
10
20
30
40
Jun-2001
Nov-2001

Apr-2002
Sep-2002
Feb-2003
Jul-2003
Dec-2003
May-2004
Oct-2004
Mar-2005
Aug-2005
Jan-2006
Jun-2006
Nov-2006
Apr-2007
Sep-2007
E. Asia
SE Asia
China
NIEs

Source:WorldBankda taandstaffestimates. 




19
EAST ASIA & PACIFIC UPDATE

 
Giventhesteepdeclineofthe
dollarin2007,it al soisworth

looking at exports in local
currency terms.And to get a
more detailed view  of export
momentum, consider
seasonally adjusted quarter‐
on‐quarter growth in the
rollingthree ‐monthlyaver age.
The local  curre ncy ex port 
momentumforEm er gin gEast

Asiaasawholeeasedofffrom
approximatel y 16 percen t in
the fourth qu arter of 2 006 to
11 percent in the fourt h
quarter of 2007 (figure 12).
The analysis confirms that
export momentum in South
East Asia and the NIEs was
reboundi nginlate2007,while
also suggesting that export
momentum from China
continued to gradually ease
intolate2007andear ly2008.Interestingly, recent months are amongtherare tim es when
exportgrowthinothermainEastAsianeconomiesisrunninghi gherthaninChina.
ThispatternofagradualeasinginEastAsianexportgrowth,orevenofexport
recoveryduring
aglo baleconomicslowdown,is verydi fferentfro mthe last major US downturnin2001.At 
thattime ,EastAsi anloc alcurrencyex portmomentumplungedfrom25 percenttonegative
10percentover12mo nt hs.Butifth emorere centpatterncontinuesinto2009,itcouldhelp
the

regionachievemore ofa“soft
landing”thanasteepdownturnor
recession as experienced in  2001 .
Several factors explain the
difference between the recent
shallow descent of East Asian
export growth compared to its
sudden,steeppl ung ein2001.
First, US import growth itself
eased lower gradually in 2007
(figure
 13).Year‐on‐year US$
import growth will doubtless
become negative as US  economic
growthslowsfurtherin2008 .Yet, 
the pace of decline may remain
shallower than in 2001. One
reason is that US electro nics and
high‐technology imports,
Figure12.EastAsiaExportMomentum(Localcurre ncy.
3mo/3mo‐%changeSAAR.Jan.04‐Jan08)
-10
0
10
20
30
40
5
0
Jan-2004

Apr-2004
Jul-2004
Oct-2004
Jan-2005
Apr-2005
Jul-2005
Oct-2005
Jan-2006
Apr-2006
Jul-2006
Oct-2006
Jan-2007
Apr-2007
Jul-2007
Oct-2007
Jan-2008
E.Asia
SE Asia
China
NIEs
Source:WorldBankda taandstaffestimates. CencusX‐12
trend‐cyclecomponent.Regionalweightsusin g2000US$
exports
Figure13. USImportGrowth
(%changeyearago.Oct2000‐Jan2008)
Oct-00
A
pr-01
Oct-01
A

pr-02
Oct-02
A
pr-03
Oct-06
Oct-03
A
pr-04
Oct-04
A
pr-05
Oct-05
A
pr-06
Oct-07
Apr-07
-30
-20
-10
0
10
20
3
0
US Imports - High Tech (SITC 75-77)
US Imports - Ex fuel and high tech
Source:WorldBankda taandstaffestimates. 





20

East Asia: Testing Times Ahead


 
especiallyimportantmarkets forEastAsianexporters,ha vedeclinedatab outthe samepace
as overallnon‐fuel/non‐hi ghtech exports.This is quite unlike the 2001 recession, when the
endofahigh‐techspendingboomledtoasuddenandsteepcollapseinUShigh‐techimports,
followedby
 asharp fall in other imports.Re cen tdataonhig h‐tech equipmen torders in G3
countriesandonwo rldsemiconduc torsalessuggeststh atglobalhigh‐techdemandindeedis 
waninginlinewiththebr oad erdownshiftindomesticdemandgrowthindevelopedcountries.
Thisdeclineislikelytobere flected
inweakerEastAsianexportgrowthinthemonthsahead.
However, there is little  in the  data so far to suggest a steep high‐tech‐led downturn of the 
2001type.
Asecondfactor explai ningtherece ntresilience
of East Asian exports is that export markets
otherth antheUShave
held upwell,andEast
Asianexportershavenimblymadethemostof
the opportunity. Figure 14 shows that US$
import grow th in non‐US industrial countries
ran at approximately 13 percentin 2007, well
above the 5 percent import pace in the US.
Imports by developing countries outside East 
Asiaals ogrewbyapproximately17percentin
2007. Strong East Asian exports to booming

developin g country markets elsewhere––in
particular tooil‐richmarketsintheMiddleEast
andRussia–– areoneofthefactorscontributing
to the unexpected strengthening of exports
from many EastAsi aneconomies in late 2007
andearly
2008.
The growing importance and resilience of
emerging countries as factorsin world output
andtra degrowthare2ofth emost important
globaleconomicdevelopmentsover thelas t5
years.In fact, while US imports have fallen
from 19 percent in 2000 to less  than 15
percent of total
world imports, developing
countries outside East Asia now comprise 22
percent of  the  tot al, and East  Asi a comp rises
another19percent(figure 15).
What about intra‐East Asian trade, which
comprises a little over 40 percent of overall
East Asian exports? Can it help sustain East
Asian growth during a US
 recession, in
particular , through expor ts from the rest of
East Asia to China? As many observers
(including the authors of this report) have
pointed out, a significant part of intra‐East
Asianexports,perhap stwo‐thirds,comprises
Figure14. EastAsi anExportandGlobalImpor t
(%change1990‐2007)

-15
-5
5
15
25
East Asia Exports
Ind.Countries ex USA Imports
Developing ex East Asia Imports
1990 1992 1994 1996 1998 2000 2002 2004 2006
USA Imports

Source:IMFIFS.

Figure15.ShareofWorldImport(percent,1990‐2007)
10
15
20
25
1990 1993 1996 1999 2002 2005
40
45
50
55
6
0
East Asia
Developing ex East Asia
USA
Industrial Countries ex USA - RHS


Source:IMFIFS.




21
EAST ASIA & PACIFIC UPDATE

 
trade in intermediate products
that are ultimatel y exported
outside the region.
6
 Thus, a
significant slowdown in exports
outsidethe region alsowould be
reflected in slower intra‐Asian 
exportswithintheregion.
Two provisos coul d be added to 
this widely accepted story. First ,
theshareofEastAsianexportsto
the US is declini ng even after
accounting for intra‐Asia n trade.

A simpl e way to see this is to
imagine East Asia as a single
integrated economy, netting out
all intra‐East Asian trade.Ex ports 
totheUSasashareofEastAsia’s
purely extra‐regional exports

have fallen from 34 percent in
1999 to 29 percent in 2006
(figure
16).Meanwhile,theshare
of other developing countries
surged from 17 percent in 1999
to26percentin2006––almostas
importantas theUSmarket.
Second, the character of intra‐
East Asian tra de flows also is
likely to undergo structural
change over time. Observers
have noted  that Ch ina’s
increasingly sophisticated
domestic
 production capacity is
allowing it to  so urce more of its
input needs from within China.
Thishasmeantthatimportshave
become increasingly delinked
from exports in the last 2–3
years.TheassociationofChina’simportswithitsexportsfellsharplyinbothsizeandstatistical
significance between 1994–99 and
2000–05, while the association with domestic demand
increasedjustasdram ati cally.
7
Ifth istrendcontin uesand ifot herEastAsi aneconomiesare
abletoexploitthesenewopportunitiesinChina’sdomesti cmarket,then,ove rtime,Chinaalso
islikel ytobecomeanincreasinglyimportantinde pen dentgrowthpolefortherestofEastAsia.
Figure17showsinterestingdi fferencesinthepattern

ofChina’sim portsfromthoseoftherest


6
WorldBankEastAsiaUpdate,November2006.
7
LiCuiandMurtazaSyed,“TheShiftingStructureofChina’sTradeandProduction,”IMFWorking
PaperWP/07/214,September2007.
Figure16. IntegratedEastAsia’sEx por tMarkets*
(Percentoftotalexports;1990‐2006)
USA
Japan
Other Industrial
Developing ex East Asia
* Exports to various markets as % of total East Asian
exports excluding intra-East Asian exports.
10
15
20
25
30
35
1990 1994 1996 1998 2002 20061992 2000 2004

Source:IMFDOTandWorldBankstaffes tima tes.
Figure17. China
–
ImportsfromEastAsia
(US$.3.mo.averages‐%changeyearago)
-

10
0
10
20
30
40
50
6
0
Jan-2001
Jun-2001
Nov-2001
Apr-2002
Sep-2002
Feb-2003
Jul-2003
Dec-2003
May-2004
Oct-2004
Mar-2005
Aug-2005
Jan-2006
Jun-2006
Nov-2006
Apr-2007
Sep-2007
Feb-2008
China's imports from East Asia *
China's exports to the USA
East Asia includes Indonesia, Korea, Malaysia,

Philippines, Singapore, Taiwan (China) and Thailand

Source:WorldBankda taandstaffestimates. 