Impact of Credit Crunch on Asian Countries

The impacts of the credit crunch (which was originated from the US) hit emerging Asian countries the most (Emerging Asia: China, India, Korea, Hong Kong, Malaysia, Indonesia, Vietnam, Thailand and Philippines) rather than other Asian countries. The reason was that emerging Asian countries have a more open market and economical relations with the US (Hong et al, 2009). However, the impacts have been limited up to now as Asian countries only have very little exposure to what is called toxic assets: subprime mortgages and other related products (James et al, 2008). The reason that Asian countries had little exposure to the toxic assets came from the great Asian crisis in 1997/98. Asian countries have to move backward in terms of economic development during the 1997/98 crisis which has also become a big advantage for them. As the result of moving backwards, Asian countries were reluctant to enter the market of complex and sophisticated financial products (which was known later as ‘toxic assets’). 

Asian countries have undergone a massive reformation and restructuring from the crisis happened about a decade ago. Therefore, the level of economic sustainability has improved significantly since then. Moreover, the shape of Asian banks has also improved significantly throughout the years (James et al, 2008). Adams (2008) stated that the main improvements that Asian banks have are consolidation and rationalization, much better transparency and disclosure, enhanced of foreign ownership and high decrease in government’s ownership. As the result of the crisis, Asian banks have also enhanced its level of supervision and structured regulations regarding risks. Thus, they were well-prepared to face risks and managed to prevent subprime products. 

The crisis did have an impact on Asian market. It came through several channels such as banks and short-term credit markets. 

Until May 2008, the total of world largest banks and securities’ write-down and credit losses was US$379 billion. From his amount, only $19.5 billion came from Asia. Despite the low impact from direct exposure, the indirect exposure has much greater impact on Asian banks. It was due to the exposure to the US and European financial institutions that possessed a lot of toxic assets. Those financial institutions include AIG, Bear Stearns, Fortis, Lehman Brothers and UBS which were huge institutions with a very wide international networking and business deals in Asia (James et al, 2008).

Lehman Brothers was probably the most affected financial institution by the US subprime mortgage. As one of the largest US investment banks, the company could not sustain the consequences that came up through the vast investments in toxic assets. Therefore, it declared bankruptcy on 15 September 2008.

Impacts of Lehman’s bankruptcy on Asian banks have not been significant. Asian countries which were affected the most economically were China, Taiwan (Taipei) and Korea. Below is the table of list of banks which affected the most by Lehman Brothers in emerging Asia.

Bank	Economy	Exposure (million US$)
Citibank (Hong Kong, China branch)	Hong Kong, China	275
Mega Financial	Taipei, China	200
Industrial and Commercial Bank of China	China	152
Banco de Oro	Philippines	134
Bank of China	China	129
Bangkok Bank	Thailand	101
Bank of Nova Scotia (Singapore branch)	Singapore	93
Development Bank of the Philippines	Philippines	90
Shin Kong Fin	Taipei, China	80
Metropolitan Bank and Trust Company	Philippines	71

Source: Reuters (2008)

Commercial banks still are the biggest influence on the Asian financial systems. Therefore, the regulators put extensive supervision and evaluation to the banking systems. It was proven that the Asian banking systems were solid during the US credit crisis in 2007. About 75% of clothing production from Asian manufacturers was exported to the US. 

Reference:

Adams, C. (2006) Global Current Account Imbalances. Lee Kuan Yew School of Public Policy, National University of Singapore.

James, W. E., Park, D., Jha, S., Jongwanich, J., Terada-Hagiwara, A. & Sumulong, L. (2008) 'The US Financial Crisis, Global Financial Turmoil, and Developing Asia: Is the Era of High Growth at an End?', ADB Economics Working Paper Series, 139.Kiseok, H., Lee, J. & Tang, H. C. (2009) 'Crises in Asia: Historical perspectives and implications', Journal of Asian Economics.

Kiseok, H., Lee, J. & Tang, H. C. (2009) 'Crises in Asia: Historical perspectives and implications', Journal of Asian Economics.