China spillover to Asia

Abstract

This dissertation consists of three essays.

Deeper intraregional financial integration is prominent on Asian policymakers agenda. Chapter 1 takes stock of Asias progress toward that objective, analyzing recent trends in cross-border portfolio investment and bank claims. Then, it investigates the drivers of financial integration by estimating a gravity model of bilateral financial asset holdings on a large sample of source and destination countries worldwide, focusing in particular on the role of regulation and institutions. The paper concludes that financial integration in Asia could be enhanced through policies that lower informational frictions, continue to buttress trade integration and capital market development, remove restrictions to foreign flows and bank penetration, and promote a common regulatory framework.

Chapter 2 trace Japanese corporate investment across different types of firms over the past decades and estimate the main determinants of investment. We find that there are differences in investment behavior between firms expanding abroad and those operating mainly in domestic markets. On the back of a trend increase in production offshoring, investment by large companies, especially those in the transportation sector, is more positively associated with cash flow while responding less to Q ratio. These findings are consistent with the subdued recovery of private investment in recent years despite booming stock markets and the large build up of cash holdings by Japanese corporates.

Country-specific Financial Condition Indices for Asian economies have been constructed in Chapter 3 with weights estimated by using vector auto-regressions (VARs). Building on this, empirical firm-level analysis based on the 12 largest Asian countries (other than China) covering the period 2000-2013 reveals the existence of financial spillovers from China by illustrating China FCIs impact on other Asian economies investment. The results show that firms that rely more on external financing tend to be affected more, especially in emerging Asian economies. Financial spillovers from China to the region seem also to have increased since the Global Financial Crisis.