## Introduction

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### Scope, data, and methods
- Purpose: Assess whether Asia-Pacific’s expanded role in global trade and GDP has been matched by expanded and deeper integration in global finance through systematic analysis of cross-border financial data.
- Approaches:
  - Descriptive analysis of past trends in financial positions.
  - Network analysis to characterize inter- and intra-regional financial linkages and compute centrality and centralization metrics (node-level: weighted eigenvector centrality; network-level: extent transactions are routed through a few hubs versus evenly spread).
  - Gravity model to examine interaction between trade and financial integration and identify macroeconomic and policy drivers.
- Data sources:
  - Balance of Payments and International Investment Position (IIP) aggregated cross-border stocks and flows.
  - CDIS: bilateral FDI positions (since 2009).
  - CPIS: bilateral FPI positions (since 2001, with early gaps for the Chinese mainland and India).
  - DOTS: bilateral trade.
  - BIS Locational Banking Statistics: bilateral cross-border banking exposures (select pairs since 2005).
  - WEO: macroeconomic variables.

### High-level finding: financial integration lags trade and GDP
- Asia-Pacific’s global shares:
  - Trade: 24 (2001), 29 (2009), 34 (2019), 33 (2023) percent of global total.
  - GDP: 24 (2001), 26 (2009), 34 (2019), 33 (2023) percent of global total.
- External positions and instrument shares (global totals):
  - External assets and liabilities (IIP-based) in 2023: assets = 21 percent, liabilities = 16 percent of global totals.
  - Asia-Pacific share in global FDI positions: na (2001), 12 (2009), 16 (2019), 20 (2023) percent.
  - Asia-Pacific share in global FPI positions: 12 (2001), 12 (2009), 14 (2019), 14 (2023) percent.
  - Asia-Pacific share in cross-border bank lending: 17 (2001), 11 (2009), 21 (2019), 19 (2023) percent.
- Key interpretation:
  - Asia-Pacific’s role in global finance has increased only modestly relative to its rising role in global trade and GDP; overall financial integration remains relatively low and heterogeneous across economies and instruments.
  - Analysis excludes positions between Hong Kong SAR and the Chinese mainland where possible; intra-China positions account for 30 percent of Asia-Pacific’s FDI claims and 24 percent of its FDI liabilities.

### Heterogeneity across income groups and economies
- Advanced Asia-Pacific (AEs) vs Emerging Asia-Pacific (EMs):
  - Advanced Asia-Pacific is well integrated into global financial markets; Emerging Asia-Pacific exhibits more limited integration.
  - Advanced Asia-Pacific’s share of global GDP and trade decreased since early 2000s while its shares of FDI, FPI, and cross-border banking claims stayed stable or grew.
  - Emerging Asia-Pacific’s share of global finance has not matched its rapid growth in global GDP and trade.
- Flow dynamics (2014–2023 decade averages and aggregates):
  - Advanced Asia-Pacific average annual increase in gross cross-border financial claims (sum of cross-border assets and liabilities for FDI, FPI, and other investment): 22.5 percent of GDP.
  - EM Asia-Pacific’s average annual increase in financial claims: 6 percent of GDP.
  - Advanced Asia-Pacific accounted for two-thirds of the region’s net capital exports (measured as region-wide growth in FDI, FPI, and other investment claims less liabilities) over 2014–2023.

### Geography of Asia-Pacific capital flows (selected shares, 2023)
- FDI claims geographic distribution:
  - 42 percent of Asia-Pacific economies’ FDI claims were on other Asia-Pacific economies.
  - Another 40 percent of FDI claims split roughly between the Americas (mostly the US) and offshore financial centers in the Caribbean.
- Cross-border foreign portfolio holdings geographic distribution:
  - Americas: 45 percent.
  - Offshore financial centers: 18 percent.
  - Other Asia-Pacific economies: 17 percent.
- Interpretation: Capital is geographically concentrated and largely flows within Asia-Pacific and to the Americas and offshore financial centers.

### Instrument-specific findings — FDI
- Aggregate and comparative levels:
  - Asia-Pacific aggregate FDI positions: 45 percent of regional GDP (2023) versus over 100 percent of GDP for Africa, Europe, and the Middle East and North Africa.
  - Intra-regional FDI stock: about 8 percent of regional GDP in 2023.
- Growth and resilience:
  - Aggregate FDI in Asia-Pacific grew faster than in most regions in the decade ending in 2023.
  - Asia-Pacific’s share in global FDI positions increased from 12 percent (2009) to 20 percent (2023).
- Network structure:
  - FDI interconnections within Asia-Pacific are widespread and relatively decentralized; centralization is fairly low.
  - Multiple economies act as intra-regional FDI hubs (e.g., Singapore), with China remaining the most central node though its centrality has declined slightly over the past 15 years.

### Instrument-specific findings — FPI
- Levels and composition:
  - Gross FPI claims in Asia-Pacific: 59 percent of regional GDP in 2023 (sum of each country’s inbound and outbound positions).
  - FPI integration is relatively small globally; other regions range from 80 to 280 percent of GDP.
  - Equity positions have become more prevalent than debt in portfolio positions; by 2023 global holdings of Asia-Pacific equity investments are almost twice those of Asia-Pacific debt investments.
- Intra-regional FPI:
  - Asia-Pacific intra-regional portfolio positions: 5 percent of regional GDP in 2023.
  - Intra-regional FPI network is highly centralized and dominated by select AEs:
    - Japan: by far the largest recipient and source (though centrality has declined slightly).
    - Australia: second most significant and gradually expanding.
    - China and India: exposures grown but remain small; China’s role has stagnated since 2019.
- Bond market shifts:
  - Asia-Pacific countries’ portfolio debt claims on other Asia-Pacific countries rose from 13 percent in 2012 to 20 percent in 2023.
  - Non-regional investors’ share of Asia-Pacific cross-border debt liabilities dropped slightly from 2013 to 2023, notably in AEs and IFCs.

### Instrument-specific findings — Cross-border banking
- Regional share and trends:
  - Asia-Pacific’s share in cross-border banking claims doubled over the past 15 years to a fifth (20 percent) in 2023, but remains below its share in global GDP and trade.
- Intra-regional cross-border banking linkages:
  - Intra-regional integration in cross-border banking has advanced from low levels, with richer interlinkages in combination with FDI for some economies.
  - Cross-border bank lending data are dominated by loans and deposits but include debt securities and other instruments (some overlap with FPI).
- Box 1 extended findings (select quantitative highlights):
  - Cross-border bank lending (stocks) to AEs in Asia-Pacific from outside the region:
    - Risen from under 15 percent of borrower GDP in 2005 to over 30 percent by 2024.
    - In nominal terms, amounts have nearly tripled over the same period.
    - As of 2024, Asia-Pacific AEs had lent 2.6 trillion dollars to other regions.
  - Cross-border bank lending to Asia-Pacific EMs from outside the region:
    - Declined to just under 3 percent by 2024, a tenth of the level for AEs.
    - In nominal terms, lending to Asia-Pacific EMs rose from 0.2 trillion dollars in 2005 to 0.6 trillion in 2024.
  - Intra-regional borrowing (borrowers’ perspective):
    - Asia-Pacific AEs: borrowing from within the region nearly tripled as a percent of borrower GDP between 2005 and 2024, reaching 24 percent of GDP in 2024.
    - Asia-Pacific EMs: intra-regional borrowing has fluctuated around 2 percent of borrower GDP; in nominal terms it has grown substantially.
  - EMs’ lending (lenders’ perspective): increased from approximate 0.4 percent of borrowers’ GDP in 2005 to more than 2.1 percent by 2024.
  - Network centrality and hub evolution:
    - Intra-regional cross-border banking network is becoming less centralized; Hong Kong SAR has overtaken Japan and Singapore in relative importance as the primary regional hub; Japan remains a key global source; Singapore steady; Australia’s importance growing; Chinese mainland’s presence in the regional banking network has grown.

### Trade–finance nexus (gravity model evidence)
- Two-step empirical approach:
  1. Gravity model for bilateral financial positions with trade flows as explanatory variable, controlling for origin-time, destination-time, and asymmetric country-pair fixed effects; estimator: Poisson Pseudo-Maximum Likelihood.
  2. Regress origin and destination country-time fixed effects on domestic macroeconomic and institutional variables (log real GDP, real short-term interest rate, fiscal balance (% of GDP), current account balance (% of GDP), Financial Development Index, Capital Flow Controls, EFI measures).
- First-stage results:
  - Strong positive link between trade and outward FDI.
  - A one percent increase in trade flows between origin and destination is associated with an increase in the stock of outward FDI of 0.14 percent.
  - A one percent increase in trade is associated with higher cross-border bank lending by 0.05 percent (not statistically significant).
  - Coefficients for portfolio investments are smaller and not statistically significant.
- Interpretation: trade integration and FDI are mutually reinforcing; trade does not clearly predict portfolio investments or bank lending in this specification.

### Domestic drivers of bilateral financial positions (selected empirical highlights)
- Origin-country drivers (Table 3 highlights; standard errors in parentheses):
  - Ln Real GDP coefficients:
    - FDI: 0.580** (0.284)
    - Assets: Portfolio: 1.208*** (0.397)
    - Assets: Debt: 0.862** (0.379)
    - Assets: Equity: 1.622*** (0.383)
    - Bank Lending: 0.117 (0.189)
  - Real Short-term Interest Rate:
    - Bank Lending: 0.003*** (0.001)
    - Portfolio and Debt: 0.008*** (0.002) each
  - Financial Development Index:
    - Assets: Portfolio: 1.623*** (0.585)
    - Assets: Equity: 2.332** (0.880)
    - Bank Lending: 1.420** (0.623)
  - Capital Flow Freedom (origin):
    - Assets: Portfolio: 0.295* (0.168)
    - Assets: Equity: 0.597* (0.323)
  - Model statistics:
    - R2: 0.983 (FDI), 0.977 (Portfolio), 0.968 (Debt), 0.972 (Equity), 0.973 (Bank Lending)
    - Observations: 78,033 (FDI), 103,574 (Portfolio), 88,699 (Debt), 78,728 (Equity), 96,244 (Bank Lending)
- Destination-country drivers (Table 4 highlights; standard errors in parentheses):
  - Ln Real GDP coefficients:
    - FDI: 0.965*** (0.283)
    - Assets: Portfolio: 1.879*** (0.339)
    - Assets: Debt: 2.379*** (0.420)
    - Assets: Equity: 1.212*** (0.296)
    - Bank Lending: 0.684*** (0.202)
  - Current Account (% GDP):
    - FDI: -0.005** (0.003)
    - Assets: Equity: -0.012* (0.007)
  - Fiscal Budget (% GDP):
    - Bank Lending: -0.011* (0.006)
  - Financial Development Index (destination):
    - Bank Lending: 1.666*** (0.580)
  - Model statistics:
    - R2: 0.966 (FDI), 0.946 (Portfolio), 0.916 (Debt), 0.944 (Equity), 0.969 (Bank Lending)
    - Observations: 71,258 (FDI), 80,441 (Portfolio), 71,073 (Debt), 65,924 (Equity), 99,366 (Bank Lending)

### Asia-Pacific International Financial Centers and data implications (Box 1)
- Hong Kong SAR and Singapore are major IFCs and accounted for more than half of total growth in inbound and outbound FDI positions from 2013-2023; their share of FPI position growth over the same period was around 20 percent.
- Holding companies and funds dominate many IFC positions:
  - Hong Kong SAR: over two-thirds of outbound and inbound FDI positions are investment and holding companies.
  - Singapore: investment and holding companies make up 50 and 62 percent of outbound and inbound FDI positions, respectively.
- IFCs can obscure the true source and destination of capital flows and overstate linkages to real economic activity, creating surveillance and data-gap challenges.

### Potential benefits and risks of deeper regional financial integration
- Potential benefits:
  - Reduce cost of capital.
  - Improve risk management and external risk sharing.
  - Enhance efficiency in capital markets and tradeable services.
  - Leverage economies of scale in regional financial hubs.
  - Increase prospects for productivity improvements via technology transfer and knowledge diffusion from increased FDI linkages.
- Potential risks:
  - Greater exposure to global shocks and the global financial cycle.
  - Data gaps and opaque routing through IFCs complicate risk analysis.
  - Rising protectionism and geoeconomic fragmentation can dampen cross-border capital flows and affect portfolio allocations.

### Policy considerations and recommended preconditions
- Policy actions to harness benefits while mitigating risks:
  - Maintain up-to-date financial sector regulations.
  - Implement well-calibrated macroprudential policies.
  - Strengthen supervisory frameworks to ensure systemic stability.
  - Address data gaps—particularly around non-bank financial institutions and ultimate source and destination of investments—to enable effective risk monitoring.
  - Pursue gradual liberalization of capital transactions in tandem with continued progress in cross-border payment infrastructure.
- Preconditions for gradual capital account liberalization:
  - Domestic financial market deepening.
  - Strong macroprudential frameworks.
  - Exchange rate flexibility.
  - Adequate reserve buffers.
  - These reforms are especially important for EMs.
- Institutional guidance:
  - The IMF’s Integrated Policy Framework (IPF) and Institutional View (IV) on capital flows offer guidance on the use of capital flow management measures.

### Technology and regional cooperation
- Potential enablers of deeper, smoother integration:
  - Real-time cross-border payments, open banking and API-based ecosystems.
  - Use of AI and blockchain in trade finance.
  - Expanding intra-regional swap lines to bolster the financial safety net.
  - Aligning regulatory standards in investor protection, dispute resolution, and bankruptcy procedures.

*Source: wpiea2026154-source-pdf - Introduction (IMF Working Paper — The Changing Landscape of Financial Integration in Asia-Pacific).*

### Introduction ...........................................................................................................

### Introduction

### Major Themes and Sections
- Introduction ......................................................................................................................................................... 4
- Asia-Pacific is not to Global Finance what it is to Global Trade .................................................................... 6
- Methodological Considerations and a Primer in Network Analysis ............................................................... 8
- FDI: Overall FDI Remains Low, However Intra-Regional Linkages are Growing ........................................ 10
- FPI: Limited Cross-Border Integration ............................................................................................................ 12
- Cross-Border Banking: Strong Global Links for AEs, Growing Regional Integration for EMs ................. 16
- Understanding Financial Positions: A Gravity Model ................................................................................... 22
- Conclusions ........................................................................................................................................................28
- References .........................................................................................................................................................30

### Boxes
- 1. Asia-Pacific’s Financial Centers and Challenges for Capital Flow Surveillance ............................................. 15
- 2. Trade and Financial Networks: Properties Compared .................................................................................... 21

### Figures (listed as in source)
- 1. Asia-Pacific’s Share of Selected Global Indicators: By Income Status ............................................................. 7
- 2. Gross Financial Account Flows  as Percent of Regional GDP .......................................................................... 7
- 3. Trade Network in Asia-Pacific ........................................................................................................................... 9
- 4. Eigenvector Centrality in the Trade Network ................................................................................................... 10
- 5. Country Centrality in the FDI Network ............................................................................................................. 11
- 6. FDI Network in Asia-Pacific ............................................................................................................................. 12
- 7. Eigenvector Centrality in the CPIS Network .................................................................................................... 13
- 8. FPI Network in Asia-Pacific ............................................................................................................................. 14
- 9. Bank Lending to Asia-Pacific from Outside Asia-Pacific ................................................................................. 16
- 10. Banking Lending to Outside Asia-Pacific from Asia-Pacific .......................................................................... 17
- 11. Bank Lending to Asia-Pacific from within Asia-Pacific (Borrowers’ Perspective) .......................................... 18
- 12. Bank Lending to Asia-Pacific from within Asia-Pacific (Lenders’ Perspective) ............................................. 19
- 13. Eigenvector Centrality in the Bank Lending Network .................................................................................... 20
- 14. Cross-Border Bank Lending Network in Asia-Pacific .................................................................................... 20
- 15. Effects of Trade on Financial Positions ......................................................................................................... 24

### Tables (listed as in source)
- 1. Asia-Pacific's Share in Global Total of Selected Indicators (Percent) ............................................................... 6
- 2. Foreign Direct Investment and Foreign Portfolio Investment: Selected Measures ......................................... 10
- 3. Origin-Country Domestic Factors Influencing Financial Positions .................................................................. 26
- 4. Destination-Country Domestic Factors Influencing Financial Positions .......................................................... 27

### Glossary (selected acronyms and definitions as listed)
- ADB: Asian Development Bank
- AE: Advanced Economy
- AI: Artificial Intelligence
- AMRO: ASEAN+3 Macroeconomic Research Office
- API: Application Programming Interface
- AREAER: Annual Report on Exchange Arrangements and Exchange Restrictions
- ASEAN: Association of Southeast Asian Nations
- ASEAN+3: ASEAN plus China, Japan, and Korea
- BIS: Bank for International Settlements
- CDIS: Coordinated Direct Investment Survey
- CFM: Capital Flow Management (Measures)
- CPIS: Coordinated Portfolio Investment Survey
- DOTS: Direction of Trade Statistics
- EFI: Economic Freedom Index
- EM: Emerging Market Economy
- EU: European Union
- FDI: Foreign Direct Investment
- FPI: Foreign Portfolio Investment
- FSB: Financial Stability Board
- GDP: Gross Domestic Product
- G‑SIBs: Global Systemically Important Banks
- IFC: International Financial Center
- IMF: International Monetary Fund
- IPF: Integrated Policy Framework
- IPO: Initial Public Offering
- IV: Institutional View (on Capital Flows)
- ROW: Rest of the World
- SAR: Special Administrative Region
- WEO: World Economic Outlook

*Source: wpiea2026154-source-pdf - Introduction (IMF Working Paper — The Changing Landscape of Financial Integration in Asia-Pacific).*

### Introduction

### Introduction

### Scope, data, and methods
- Purpose: Assess whether Asia-Pacific’s expanded role in global trade and GDP has been matched by expanded and deeper integration in global finance through systematic analysis of cross-border financial data.
- Approaches:
  - Descriptive analysis of past trends in financial positions.
  - Network analysis to characterize inter- and intra-regional financial linkages and compute centrality and centralization metrics.
  - Gravity model to examine interaction between trade and financial integration and identify macroeconomic and policy drivers.
- Data sources used:
  - Balance of Payments and International Investment Position (IIP) aggregated cross-border stocks and flows.
  - CDIS (Coordinated Direct Investment Survey): bilateral FDI positions (since 2009).
  - CPIS (Coordinated Portfolio Investment Survey): bilateral FPI positions (since 2001, with early gaps for the Chinese mainland and India).
  - DOTS (Direction of Trade Statistics): bilateral trade.
  - BIS Locational Banking Statistics: bilateral cross-border banking exposures (select pairs since 2005).
  - WEO (World Economic Outlook): macroeconomic variables.
- Network measures:
  - Node-level centrality: weighted eigenvector centrality.
  - Network-level centralization: extent transactions are routed through a few hubs versus evenly spread.

### High-level finding: financial integration lags trade and GDP
- Asia-Pacific’s global shares:
  - Trade: 24 (2001), 29 (2009), 34 (2019), 33 (2023) percent of global total.
  - GDP: 24 (2001), 26 (2009), 34 (2019), 33 (2023) percent of global total.
- External positions and instrument shares (global totals):
  - External assets and liabilities (IIP-based) in 2023: assets = 21 percent, liabilities = 16 percent of global totals.
  - Asia-Pacific share in global FDI positions: na (2001), 12 (2009), 16 (2019), 20 (2023) percent.
  - Asia-Pacific share in global FPI positions: 12 (2001), 12 (2009), 14 (2019), 14 (2023) percent.
  - Asia-Pacific share in cross-border bank lending: 17 (2001), 11 (2009), 21 (2019), 19 (2023) percent.
- Key interpretation: Asia-Pacific’s role in global finance has increased only modestly relative to its rising role in global trade and GDP; overall financial integration remains relatively low and heterogeneous across economies and instruments.
- Note: Analysis excludes positions between Hong Kong SAR and the Chinese mainland where possible; intra-China positions account for 30 percent of Asia-Pacific’s FDI claims and 24 percent of its FDI liabilities.

### Heterogeneity across income groups and economies
- Advanced Asia-Pacific (AEs) vs Emerging Asia-Pacific (EMs):
  - Advanced Asia-Pacific is well integrated into global financial markets; Emerging Asia-Pacific exhibits more limited integration.
  - Advanced Asia-Pacific’s share of global GDP and trade decreased since early 2000s while its shares of FDI, FPI, and cross-border banking claims stayed stable or grew.
  - Emerging Asia-Pacific’s share of global finance has not matched its rapid growth in global GDP and trade.
- Flow dynamics (2014–2023 decade averages and aggregates):
  - Advanced Asia-Pacific average annual increase in gross cross-border financial claims (sum of cross-border assets and liabilities for FDI, FPI, and other investment): 22.5 percent of GDP.
  - EM Asia-Pacific’s average annual increase in financial claims: 6 percent of GDP.
  - Advanced Asia-Pacific accounted for two-thirds of the region’s net capital exports (measured as region-wide growth in FDI, FPI, and other investment claims less liabilities) over 2014–2023.

### Geography of Asia-Pacific capital flows (selected shares, 2023)
- FDI claims geographic distribution:
  - 42 percent of Asia-Pacific economies’ FDI claims were on other Asia-Pacific economies.
  - Another 40 percent of FDI claims split roughly between the Americas (mostly the US) and offshore financial centers in the Caribbean.
- Cross-border foreign portfolio holdings geographic distribution:
  - Americas: 45 percent.
  - Offshore financial centers: 18 percent.
  - Other Asia-Pacific economies: 17 percent.
- Interpretation: Capital is geographically concentrated and largely flows within Asia-Pacific and to the Americas and offshore financial centers.

### Instrument-specific findings — FDI
- Aggregate FDI:
  - Asia-Pacific aggregate FDI positions: 45 percent of regional GDP (2023) versus over 100 percent of GDP for Africa, Europe, and the Middle East and North Africa.
  - Intra-regional FDI stock: about 8 percent of regional GDP in 2023.
- Growth and resilience:
  - Aggregate FDI in Asia-Pacific grew faster than in most regions in the decade ending in 2023.
  - Asia-Pacific’s share in global FDI positions increased from 12 percent (2009) to 20 percent (2023).
- Network structure:
  - FDI interconnections within Asia-Pacific are widespread and relatively decentralized; centralization is fairly low.
  - Multiple economies act as intra-regional FDI hubs (e.g., Singapore), with China remaining the most central node though its centrality has declined slightly over the past 15 years.

### Instrument-specific findings — FPI
- Levels and composition:
  - Gross FPI claims in Asia-Pacific: 59 percent of regional GDP in 2023 (sum of each country’s inbound and outbound positions).
  - FPI integration is relatively small globally; other regions range from 80 to 280 percent of GDP.
  - Equity positions have become more prevalent than debt in portfolio positions (assets and liabilities); by 2023 global holdings of Asia-Pacific equity investments are almost twice those of Asia-Pacific debt investments.
- Intra-regional FPI:
  - Asia-Pacific intra-regional portfolio positions: 5 percent of regional GDP in 2023.
  - Intra-regional FPI network is highly centralized and dominated by select AEs:
    - Japan: by far the largest recipient and source (though centrality has declined slightly).
    - Australia: second most significant and gradually expanding.
    - China and India: exposures grown but remain small; China’s role has stagnated since 2019.
- Bond market shifts:
  - Asia-Pacific countries’ portfolio debt claims on other Asia-Pacific countries rose from 13 percent in 2012 to 20 percent in 2023.
  - Non-regional investors’ share of Asia-Pacific cross-border debt liabilities dropped slightly from 2013 to 2023, notably in AEs and IFCs.

### Instrument-specific findings — Cross-border banking
- Asia-Pacific’s share in cross-border banking claims doubled over the past 15 years to a fifth (20 percent) in 2023, but remains below its share in global GDP and trade.
- Intra-regional cross-border banking linkages:
  - Intra-regional integration in cross-border banking has advanced from low levels, with richer interlinkages in combination with FDI for some economies.
  - Cross-border bank lending data are dominated by loans and deposits but include debt securities and other instruments (some overlap with FPI).

### Trade–finance nexus
- Gravity model evidence:
  - Significant association between trade and FDI.
  - No significant association found between trade and FPI or cross-border banking liabilities.
- Implication: Stronger regional trade integration is likely to generate greater cross-border flows of direct investment (FDI) but not necessarily of portfolio investment or cross-border banking liabilities.

### Potential benefits and risks of deeper regional financial integration
- Potential benefits:
  - Reduce cost of capital.
  - Improve risk management and external risk sharing.
  - Enhance efficiency in capital markets and tradeable services.
  - Leverage economies of scale in regional financial hubs.
  - Increase prospects for productivity improvements via technology transfer and knowledge diffusion from increased FDI linkages.
- Potential risks:
  - Greater exposure to global shocks and the global financial cycle.
- Policy objective: Promote resilient financial integration—capturing benefits while mitigating increased exposure to external shocks (see Alonso and others, forthcoming).

### Structure of the rest of the paper
- Section II: Comparison of Asia-Pacific’s financial integration to its role in global trade and GDP; cross-country and income-group heterogeneity.
- Section III: Data and methodology, including network analysis.
- Sections IV–VI: Cross-border integration by instrument — FDI, FPI, and cross-border banking — combining descriptive evidence with network-based measures.
- Section VII: Gravity framework exploring trade–finance relationships and macroeconomic and institutional drivers.
- Section VIII: Conclusion.

*Source: IMF Working Paper — Introduction (chapter).*

### Box 1. Asia-Pacific’s Financial Centers and Challenges for Capital Flow

### Box 1. Asia-Pacific’s Financial Centers and Challenges for Capital Flow

### Role of Hong Kong SAR and Singapore as International Financial Centers (IFCs)
- Hong Kong SAR and Singapore are identified as Asia’s International Financial Centers (IFCs) and play an increasingly important role in the region’s financial integration, particularly in FDI.
- Asia-Pacific’s IFCs have accounted for more than half of total growth in inbound and outbound FDI positions from 2013-2023.
- Their share of FPI position growth over the same period was around 20 percent.

### Financial intermediation functions and complications for surveillance
- IFCs’ financial intermediation function can:
  - Obscure the true source and destination of capital flows in standard data.
  - Overstate linkages to real economic activity (for example, FDI into shell companies).
  - Mask the nature of the financial claim (for example, when an international company issues bonds in an IFC but repatriates the funds through an FDI transaction).
- The paper uncovers evidence of the salience of these data issues for Asia-Pacific, and notes that deeper exploration is left to future analysis.

### Prevalence of holding companies, funds, and implications for data gaps
- The ubiquity of holding companies and funds in the IFC network points to growing potential for data gaps that complicate assessments of:
  - Financial integration.
  - Links between financial and real activity.
- Majority of FDI investments into IFCs represent financial investments into holding companies or funds, which may:
  - Not be directly linked to real economic activity in that region (example given: redirecting Malaysian capital to Europe via a private equity structure).
  - Not be linked to real activity at all (example given: establishing ownership links between networks of special purpose entities) (Daamgard, 2019).

### Economy-specific FDI composition and recent growth patterns
- Hong Kong SAR:
  - Over two-thirds of outbound and inbound FDI positions are investment and holding companies.
- Singapore:
  - Investment and holding companies make up 50 and 62 percent of outbound and inbound FDI positions, respectively.
  - These categories have grown rapidly, with most of Singapore’s net growth in FDI from 2020 to 2023 into investment and holding companies.

### Notes on FDI/FPI data depiction
- Box Figure described: Increase in Asia-Pacific’s FDI and FPI stock by selected investment pairs, for 2013-2018 and 2018-2023 (In billions of US dollars).
- Source: CDIS, CPIS, and IMF staff calculations.
- Note: Data shown captures five-year change in aggregated inbound and outbound investment positions of Asia-Pacific countries.
- Note: Data treatment specifics:
  - Data for Hong Kong SAR and Singapore show aggregated inbound and outbound positions for each economy.
  - Positions between Hong Kong SAR and Singapore are apportioned evenly to the two economies.
  - Positions between the Chinese mainland and Hong Kong SAR are excluded from the data.

### Cross-Border Banking: summary findings on regional integration (extended material included in same content unit)
- Certain Asia-Pacific advanced economies (AEs) are prominent hubs for international banking, significantly influencing activities both within Asia-Pacific and globally.
- Asia-Pacific emerging markets (EMs): domestic banks still drive economic growth through lending; cross-border lending plays a less significant role.
- Eight of the 29 Global Systemically Important Banks in 2024 are headquartered in Asia-Pacific, including five in China and three in Japan (BIS, 2024).

Key quantitative findings on cross-border banking integration:
- Cross-border bank lending (stocks) to AEs in Asia-Pacific from outside the region:
  - Risen from under 15 percent of borrower GDP in 2005 to over 30 percent by 2024.
  - In nominal terms, amounts have nearly tripled over the same period.
- As of 2024, Asia-Pacific AEs had lent 2.6 trillion dollars to other regions.
- Lending from Asia-Pacific AEs to the United States grew the most over the last two decades; lending to the European Union and the United Kingdom increased moderately.
- Among Asia-Pacific AEs, Japan and Hong Kong SAR are the largest hubs for inter-regional cross-border bank claims.

- Cross-border bank lending to Asia-Pacific EMs from outside the region:
  - Much lower than for Asia-Pacific AEs in percent of borrower GDP.
  - Declined to just under 3 percent by 2024, a tenth of the level for AEs.
  - In nominal terms, lending to Asia-Pacific EMs rose from 0.2 trillion dollars in 2005 to 0.6 trillion in 2024.
  - Asia-Pacific EMs’ lending to outside the region increased from approximate 0.3 percent of outside borrowers’ GDP in 2005 to nearly 0.7 percent by 2024.
  - Chinese mainland is the largest recipient of inter-regional cross-border lending among EMs.

- Intra-regional cross-border bank lending trends:
  - For Asia-Pacific AEs (borrowers’ perspective): borrowing from within the region nearly tripled as a percent of borrower GDP between 2005 and 2024, reaching 24 percent of GDP in 2024.
  - For Asia-Pacific EMs (borrowers’ perspective): intra-regional borrowing has fluctuated around 2 percent of borrower GDP; in nominal terms it has grown substantially, broadly keeping pace with borrower GDP growth.
  - For Asia-Pacific EMs (lenders’ perspective): lending from Asia-Pacific EMs to the region increased from approximate 0.4 percent of borrowers’ GDP in 2005 to more than 2.1 percent by 2024.
  - Significant increase for EMs’ lending occurred between 2015 and 2020, mostly driven by lending to other advanced economies in the region; lending to Japan and ASEAN also rose significantly.

- Network centrality and hub evolution:
  - The intra-regional cross-border banking network is becoming less centralized over time as more regional hubs have grown in significance.
  - Hong Kong SAR has overtaken Japan and Singapore in relative importance as the primary regional hub.
  - Japan remains a key source of cross-border bank lending with strong global connections, but its relative regional relevance has declined.
  - Singapore has remained steady as a key banking hub in the region.
  - Australia’s growing importance partly reflects connections with Pacific economies.
  - The Chinese mainland’s presence within the regional banking network has grown in significance.
  - Despite these changes, the banking network does not exhibit the same level of integration as trade and FDI networks, which have many more substantive bilateral connections between smaller players.

*IMF Working Paper content as presented in the source PDF.*

### Box 2. Trade and Financial Networks: Properties Compared

### Box 2. Trade and Financial Networks: Properties Compared

### Network properties: centralization and assortativity
- Centralization: measure of how unevenly centrality is distributed across nodes; high centralization = organized around one or few hubs (star-like); low centralization = centrality more evenly spread.
- Assortativity: whether nodes tend to connect to similar nodes; high assortativity = hubs connect strongly with other hubs and periphery with periphery; low assortativity = strongest connections between high and low centrality nodes.
- Empirical observations from the four networks studied:
  - Overall changes in assortativity and centralization have been small over long timeframes.
  - Dispersion primarily along centralization: the portfolio network is the most centralized; FDI and trade are the least centralized.
  - Bank lending network has become somewhat less centralized over time; centralization in other networks has changed little.
  - All four networks have increased in assortativity over time (connections between hubs and periphery have become weaker relative to hub-hub and periphery-periphery), but movements are small in magnitude (assortativity ranges from -1 to 1).

*Sources for Box Figure: CDIS, CPIS, DOTS, BIS Banking Locational Statistics and IMF staff estimates.*

### Empirical methodology: gravity model for financial positions
- Data sources: CDIS, CPIS, BIS Locational Banking Statistics, DOTS.
- Two-step approach:
  1. Estimate a gravity model for bilateral financial positions with trade flows as explanatory variable, controlling for rich fixed effects.
     - Model specification (exponential form):
       X_{i j, t} = exp[ sum_{k=0}^2 β_k log(Trade_{i j, t−k}) + μ_{i,t} + δ_{j,t} + φ_{i,j} ] + ε_{i j, t}
     - X_{i j, t} includes outward FDI, portfolio assets (debt, equity, total) and outward bank lending.
     - Trade measured as sum of imports and exports; sum of β_k (k=0..2) measures correlation between trade flows and financial positions.
     - Controls: origin country-time fixed effects (μ_{i,t}), destination country-time fixed effects (δ_{j,t}), asymmetric country-pair fixed effects (φ_{i,j}).
     - Estimator: Poisson Pseudo-Maximum Likelihood for unbalanced panels; standard errors clustered at country-pair level.
  2. Regress origin and destination country-time fixed effects from step 1 on domestic macroeconomic and institutional variables:
     - Origin: μ_{i,t} = Β_o Macro_o_{i,t} + Γ_o Institutional_o_{i,t} + ζ_i + κ_t + υ_{i,t}
     - Destination: δ_{j,t} = Β_d Macro_d_{j,t} + Γ_d Institutional_d_{j,t} + η_j + κ_t + τ_{j,t}
     - Macro variables include: log real GDP, real short-term interest rate, fiscal balance (% of GDP), current account balance (% of GDP).
     - Institutional variables include: Financial Development (Global Financial Development Database), Capital Flow Controls (AREAER category “XI. Capital Transactions”), Economic Freedom in Government and Money (Fraser Institute Economic Freedom Index).
     - Clustering: standard errors clustered at country-of-origin for origin regressions and at country-of-destination for destination regressions (conservative approach).

### First-stage results: link between trade and financial positions
- Main finding: strong positive link between trade and outward FDI; no robust link between trade and other financial instruments.
- Quantified effects:
  - A one percent increase in trade flows between origin and destination is associated with an increase in the stock of outward FDI of 0.14 percent.
  - A one percent increase in trade is associated with higher cross-border bank lending by 0.05 percent (not statistically significant).
  - Coefficients for portfolio investments are smaller and not statistically significant.
- Interpretation: trade integration and FDI are mutually reinforcing; trade does not clearly predict portfolio investments or bank lending in this specification.

### Second-stage results: domestic drivers of financial positions (highlights)
- General patterns:
  - Economic size (log real GDP) in both origin and destination countries is significantly and positively associated with bilateral financial positions (exception: origin-country log real GDP is not significant for bank lending).
  - Real short-term interest rates are positively correlated with cross-border financial positions in both origin and destination economies (some relationships not statistically significant).
  - Current account balances show weak statistical significance overall; signs are intuitive:
    - Greater past current account surpluses correlate with larger financial positions in source countries and smaller positions in recipient countries.
    - Statistically significant mainly for FDI and equity inward positions.
  - Fiscal budget effects:
    - Higher fiscal surplus in destination country associated with smaller inward bank lending (significant).
    - Higher fiscal surplus in origin country associated with lower outward financial positions (not statistically significant).
  - Financial development:
    - Stronger financial development in origin country associated with larger outward cross-border positions across asset classes, particularly significant for portfolio equity FPI and bank lending.
    - Stronger financial development in destination country significantly associated only with larger inward bank lending.
  - Capital Flow Freedom (CFMs index):
    - Asia-Pacific has eased CFMs since 2000 but remains one of the most restrictive regions (second only to sub-Saharan Africa).
    - Capital flow freedom in origin and destination countries is positively associated with bilateral cross-border financial positions except for bilateral FDI; relationships mostly not statistically significant at 10 percent, except for FPI and equity FPI in origin country.
    - Relationship between capital flow freedom and bilateral FDI is negative.
  - Economic freedom indices:
    - Smaller government in destination country positively associated with all inward financial positions except equity (relationships not statistically significant at 10 percent).
    - Smaller government in origin country associated with larger outward portfolio and equity positions (not significant).
    - Soundness of money in origin country significantly associated with greater outward FPI in portfolio (significant); destination-country soundness of money effects mixed and insignificant.

### Key numeric results from Table 3 (Origin-country domestic factors influencing financial positions)
- Dependent variables: (1) FDI from origin to destination; (2) Assets: Portfolio; (3) Assets: Debt; (4) Assets: Equity; (5) Bank Lending.
- Ln Real GDP coefficients (standard errors in parentheses):
  - (1) 0.580** (0.284)
  - (2) 1.208*** (0.397)
  - (3) 0.862** (0.379)
  - (4) 1.622*** (0.383)
  - (5) 0.117 (0.189)
- Real Short-term Interest Rate:
  - (1) 0.001 (0.001)
  - (2) 0.008*** (0.002)
  - (3) 0.008*** (0.002)
  - (4) 0.006** (0.003)
  - (5) 0.003*** (0.001)
- Financial Development Index:
  - (1) 0.212 (0.503)
  - (2) 1.623*** (0.585)
  - (3) 0.721 (0.597)
  - (4) 2.332** (0.880)
  - (5) 1.420** (0.623)
- Capital Flow Freedom:
  - (1) -0.098 (0.181)
  - (2) 0.295* (0.168)
  - (3) 0.157 (0.149)
  - (4) 0.597* (0.323)
  - (5) 0.122 (0.222)
- EFI: Size of Government:
  - (1) 0.027 (0.058)
  - (2) 0.083 (0.110)
  - (3) -0.019 (0.120)
  - (4) 0.105 (0.100)
  - (5) -0.078** (0.034)
- EFI: Soundness of Money:
  - (1) 0.008 (0.037)
  - (2) 0.099** (0.048)
  - (3) 0.089 (0.060)
  - (4) 0.128* (0.072)
  - (5) 0.022 (0.024)
- Model statistics:
  - R2: 0.983 (FDI), 0.977 (Portfolio), 0.968 (Debt), 0.972 (Equity), 0.973 (Bank Lending)
  - Observations: 78,033 (FDI), 103,574 (Portfolio), 88,699 (Debt), 78,728 (Equity), 96,244 (Bank Lending)
- Note: Standard errors clustered by origin country. * p<0.10, ** p<0.05, *** p<0.01.

### Key numeric results from Table 4 (Destination-country domestic factors influencing financial positions)
- Ln Real GDP coefficients (standard errors in parentheses):
  - (1) 0.965*** (0.283)
  - (2) 1.879*** (0.339)
  - (3) 2.379*** (0.420)
  - (4) 1.212*** (0.296)
  - (5) 0.684*** (0.202)
- Real Short-term Interest Rate:
  - (1) 0.004 (0.003)
  - (2) 0.007** (0.004)
  - (3) 0.012* (0.006)
  - (4) 0.003 (0.003)
  - (5) 0.002 (0.002)
- Current Account (% GDP):
  - (1) -0.005** (0.003)
  - (2) -0.011 (0.007)
  - (3) -0.008 (0.009)
  - (4) -0.012* (0.007)
  - (5) -0.005 (0.004)
- Fiscal Budget (% GDP):
  - (1) 0.003 (0.004)
  - (2) -0.010 (0.009)
  - (3) -0.015 (0.013)
  - (4) 0.003 (0.008)
  - (5) -0.011* (0.006)
- Financial Development Index:
  - (1) -0.402 (0.543)
  - (2) 0.440 (0.691)
  - (3) 1.428 (0.886)
  - (4) -0.255 (0.570)
  - (5) 1.666*** (0.580)
- Capital Flow Freedom:
  - (1) -0.082 (0.127)
  - (2) 0.174 (0.195)
  - (3) 0.013 (0.315)
  - (4) 0.332 (0.204)
  - (5) 0.159 (0.159)
- EFI: Size of Government:
  - (1) 0.039 (0.045)
  - (2) 0.121 (0.089)
  - (3) 0.183 (0.125)
  - (4) -0.014 (0.083)
  - (5) 0.024 (0.044)
- EFI: Soundness of Money:
  - (1) -0.008 (0.027)
  - (2) -0.001 (0.051)
  - (3) -0.044 (0.059)
  - (4) 0.025 (0.039)
  - (5) 0.009 (0.029)
- Model statistics:
  - R2: 0.966 (FDI), 0.946 (Portfolio), 0.916 (Debt), 0.944 (Equity), 0.969 (Bank Lending)
  - Observations: 71,258 (FDI), 80,441 (Portfolio), 71,073 (Debt), 65,924 (Equity), 99,366 (Bank Lending)
- Note: Standard errors clustered by destination country. * p<0.10, ** p<0.05, *** p<0.01.

*Italic source: IMF Working Paper — The Changing Landscape of Financial Integration in Asia-Pacific (Box 2 and related empirical results).*

### Conclusions

### Conclusions

### Regional integration and patterns
- Asia-Pacific does not hold the same position in global finance as it does in international trade.
- The region's share of global financial flows and foreign direct investment is growing—particularly intra-regionally—while participation in portfolio investments and cross-border bank lending remains comparatively limited.
- AEs in Asia-Pacific are strongly integrated with global financial markets, whereas Asia-Pacific EMs continue to lag peers in other regions.
- The analysis finds evidence that Asia-Pacific’s trade-oriented growth models appear more conducive to FDI integration, rather than integration of portfolio investment or bank flows.
- As Asia-Pacific continues to grow and its financial markets continue to develop, stronger cross-border financial positions are expected to accumulate, as has already been the case for the region’s AEs.

### Benefits of deeper financial integration
- Financial integration can deliver substantial economic gains:
  - Expands access to financing and lowers the cost of capital, which can stimulate growth and job creation (Obstfeld, 1994).
  - For emerging markets, supports a transition from export-led growth to a model centered on domestic investment and consumption.
  - Encourages development of domestic financial markets, reducing overreliance on banks (Levine, 1997).
  - Enhances macro and financial resilience (BIS, 2024; IMF, 2025).
  - Strengthens capital markets discipline and governance (Rajan and Zingales, 2003; Kose et al., 2009).
  - Enables investors to diversify portfolios and helps local borrowers preserve access to financing during localized economic shocks (Colacito and Croce, 2010).
  - Evolution of regional financial hubs can augment access to liquidity and generate economies of scale.
  - FDI may facilitate diffusion of knowledge, including technological or managerial know-how and on-the-job training (Borensztein and others, 1998; Berthelemy and Demurger, 2000).

### Risks and vulnerabilities from deeper integration
- Deeper financial integration increases exposure to regional and global shocks, and to shifts in global investor sentiment.
- Resilience of financial networks becomes critical as integration increases (Gai and Kapadia, 2010).
- Multiple regional hubs (for example, Singapore and Hong Kong SAR) can help reduce exposure to localized shocks in a systemic economy.
- Cross-country regulatory differences complicate coordination and oversight.
- Effective risk analysis is often constrained by data gaps and the opaque routing of financial flows through multiple financial centers.
- Rising protectionism and geoeconomic fragmentation threaten Asia-Pacific’s cross-border financial integration; barriers to trade and FDI can dampen cross-border capital flows, and geopolitical tensions have been found to affect portfolio investment allocations (Catalan and others, 2024; Gopinath and others, 2025).

### Policy considerations and recommended preconditions
- Adopt a balanced and forward-looking strategy to harness benefits while mitigating risks, including:
  - Maintaining up-to-date financial sector regulations.
  - Implementing well-calibrated macroprudential policies.
  - Strengthening supervisory frameworks to ensure systemic stability.
  - Addressing data gaps—particularly around non-bank financial institutions and the ultimate source and destination of investments—to enable effective risk monitoring.
  - Pursuing gradual liberalization of capital transactions in tandem with continued progress in cross-border payment infrastructure to facilitate smoother financial flows.
- Important preconditions for gradual capital account liberalization include:
  - Domestic financial market deepening.
  - Strong macroprudential frameworks.
  - Exchange rate flexibility.
  - Adequate reserve buffers.
  - These reforms are especially important for EMs.
- The IMF’s Integrated Policy Framework (IPF) and Institutional View (IV) on capital flows offer guidance on how capital flow management measures could be used judiciously to mitigate volatility.

### Technology and regional cooperation
- Real-time cross-border payments, open banking and API-based ecosystems, and the use of AI and blockchain in trade finance could materially reshape regional financial integration.
- Regional cooperation can be enhanced by:
  - Expanding intra-regional swap lines to bolster the financial safety net.
  - Aligning regulatory standards in areas such as investor protection, dispute resolution, and bankruptcy procedures.

*The Changing Landscape of Financial Integration in Asia-Pacific Working Paper No. WP/2026/154*

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_Source: https://www.imf.org/-/media/files/publications/wp/2026/english/wpiea2026154-source-pdf.pdf_