The People’s Bank of China has not cut rates twice in a month solely because the domestic economy is showing signs of slowing down.
Officials in Beijing, and elsewhere in Asia, are easing monetary policy in part because they are intent on getting ahead of the curve should things get much worse in the eurozone and global trade collapse in the way in did in the months following Lehman Brothers’ failure.
Two fascinating speeches made in recent days by Federal Reserve and Bank of Japan staff highlight just how grave central bankers believe the threat from Europe actually is.BoJ deputy Hirohide Yamaguchi’s talk notes three ways in which events in the eurozone affect Asia.
- First, there is a decline in export activity, the impact of which, he notes, is “not small” on China given its reliance on exports to the bloc.
- Second, there is the risk that a deleveraging by European lenders will hit banks in the region (though he claims this is not particularly problematic for Japanese and Chinese banks as they don’t relying on financing from the bloc to a great degree).
- Third, jittery market sentiment will weigh on Asian companies, making them unwilling to spend as much as they otherwise would.
Eric Rosengren, president of the Boston Federal Reserve, is altogether more gloomy than his counterpart at the BoJ on the risk of financial contagion. Rosengren believes the degree of interconnections between Asian financial firms and their US and European counterparts over the past six years have risen over recent years.
The charts below, taken from Rosengren’s talk, shows the correlations between European bank stock returns and those of international lenders in Japan and China have risen over recent years.
Events of recent years have done little to dent European banks’ presence inAsia, leaving the continent exposed to capital flight. Asian banks’ exposure to Europe has also largely held up. The claims on European institutions from Japanese and Taiwanese banks – the only two countries in the continent which produce the data – remain at a similar level to where they were at the time of Lehman Brothers.
Which leads Rosengren to conclude that a Lehman-like shock could create even more havoc in Asia now than the US investment bank’s collapse did almost four years ago.