When You Move, I Move: Increasing Synchronization Among Asia’s Economies

IMF Blog, May 5, 2014

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In valued-added terms, intraregional trade in Asia grew on average by over 10 percent a year from 1990 to 2012, twice the pace seen outside of Asia.
Business cycles in Asia have become steadily more synchronized over the past two decades, with the correlation between ASEAN economies’ growth rates almost reaching the very high levels seen within the Euro Area.
The trend increase in the value-added traded between Asian economies over the past two decades has accounted for around one-quarter of the concomitant increase in business cycle synchronization across the region.
A one percentage point decline in China’s growth lowers GDP growth in the median Asian economy by about 0.3 percentage point after a year, compared to 0.15 in the median non-Asian economy.

Bilateral trade intensity measured in value-added terms—not gross trade—better explains cross-border propagation of shocks and co-movement of economies.
Example: China’s gross exports of final goods (e.g., iPhones) overstate China’s dependence on foreign final demand because domestic value added in those exports can be small; by contrast, Korea or Taiwan POC capture sizeable value added through exports of components even if they do not export final goods directly to final consumers.
Empirical result: rising value-added trade between Asian partners has been a major synchronizing force, explaining around one-quarter of the increase in regional business cycle synchronization.

Financial integration has amplified synchronization when large global shocks (for example, the global financial crisis) trigger broad retrenchment by global banks.
In normal times, financial integration has tended to reduce synchronization somewhat, possibly by enabling international reallocation of capital following country-specific shocks.
In Asia, cross-border financial claims and flows have been comparatively small to date, so financial integration has been a less dominant factor in regional synchronization than trade integration.

China’s shift from primarily an “assembly hub”—propagating shocks from advanced economies through regional supply chains—to a larger source of final demand has increased its direct impact on regional partners.
Economies whose trade dependence on China’s final demand has risen over the past decade have generally experienced greater increases in cyclical co-movement with China.
Quantified spillover: a one percentage point decline in China’s growth lowers GDP growth in the median Asian economy by about 0.3 percentage point after a year (versus 0.15 in the median non-Asian economy).

Further trade liberalization and deeper financial integration across Asia are likely to increase spillovers and cause business cycles to become more correlated, particularly during crises.
Main policy challenge: capture the gains from greater integration while minimizing risks from larger and more synchronized downturns.
Policy options and roles:
- Self-insurance through additional reserve accumulation can help individual countries buffer shocks, but is costly and does not provide cross-country risk sharing.
- Regional financial safety nets (for example, the Chiang Mai Initiative Multilateralisation (CMIM) or bilateral swap lines between regional central banks) can play a stabilizing role and complement bilateral swap lines with non-regional central banks.
- The global financial safety net provided by the IMF will be most useful when shocks spill over to the region as a whole—such as shocks originating from China.
Greater international policy cooperation is recommended to manage the risks of more synchronized, sharper downturns while enabling Asia to harness the benefits of deeper integration.

Source: IMF Blog article “When You Move, I Move: Increasing Synchronization Among Asia’s Economies” by Romain Duval, May 5, 2014.

亦步亦趋：亚洲经济体的同步性不断增强; iMFDirect博客；2014年5月5日； Romain Duval
- 亦步亦趋：亚洲经济体的同步性不断增强; iMFDirect博客；2014年5月5日； Romain Duval (Markdown version)
- 亦步亦趋：亚洲经济体的同步性不断增强; iMFDirect博客；2014年5月5日； Romain Duval (PDF)
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- 一国の動きはほどなく他国に:アジア諸国で高まる経済連動性; ロメイン・テュバル, iMFdirectブログ, 2014年5月5日 (PDF)
Asia and Pacific
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- Asia and Pacific (PDF)