UN ESCAP Working Paper on Cross-border investment and the global financial crisis in the Asia-Pacific region

Working paper15 Dec 2009

The subprime mortgage crisis erupted in the United States in mid-2007 and was then transformed into the global financial crisis after the failure of Lehman Brothers in September 2008. The total amount of write-downs of loans and securities by financial institutions for 2007-2010 is estimated to reach $1 trillion in the United States, $604 billion in the United Kingdom, and $814 billion in the Euro Area. By contrast, the Asia-Pacific region is expected to have write-downs of only $210 billion, suggesting the limited damages incurred on the banking sector. Nonetheless, the Asia-Pacific region suffered from the global financial crisis through two channels. One channel was mainly through capital withdrawals from equity markets by foreign investors, causing a sharp drop in stock prices. The other channel was through trade linkages with advanced nations. Nearly all countries faced a contraction in exports and production owing to an abrupt decline in import demand in the United States and Europe. This paper analyses how the Asia-Pacific region was affected by the global financial crisis. To do so, the paper focuses on cross-border capital flows and investment patterns by looking at the pre-crisis features of the United States in relation to the world, as well as the Asia-Pacific region. It also focuses on net international investment positions of the Asia-Pacific region in the pre-crisis period. The paper then sheds light on the impact of the global financial crisis on the cross-border capital flows and the balance of payments in the region.