Financial Integration in the Asia-Pacific: Fact and Fiction

Abstract

Australia’s financial connectedness with the Asia-Pacific region lags behind its deepening economic, diplomatic and cultural ties with the region, according to this report by the Australian Centre for Financial Studies. The report finds that while the Asia-Pacific region represents roughly two-thirds of Australia’s global trading relationships, it still accounts for less than one-third of Australia’s financial relationships. Australia’s financial services exports and two-way investment profile remain oriented toward the ‘traditional’ trading partners of the United States, United Kingdom and New Zealand, even as four of Australia’s top five trading partners now lie in the Asia-Pacific. The report points out that financial services is the largest single industrial segment of the Australian economy, a major employer and the largest source of corporate tax revenue. The industry is also a major exporter – of a magnitude not often understood in the community. The value of Australia’s exports of financial services is in fact larger than the value of its tourism exports, and more than double the value of its education exports. High barriers to services trade and cross-border investment in Asia may be inhibiting Australian firms and investors from growing their connections with the region. This is likely to shift in 2015 with the gradual opening of China’s capital account; the realisation of a regionally-integrated ASEAN Economic Community; and the conclusion of three recent free trade agreements with China, Japan and South Korea. “All of these events will change the way in which the Australian financial system interacts with a rising Asia,” according to Amy Auster. A key finding of the report is that many aspects of financial integration are not well-researched or understood. The benefits and costs of financial integration have not been closely examined, and the data on trade in financial services is poor. Policymakers, regulators and practitioners lack a strong evidence base from which to make decisions of vital importance to the entire economy. Authors: Amy Auster, Deputy Director, and Martin Foo, Research Officer, of the Australian Centre for Financial Studies