The Changing Landscape of Financial Integration in Asia-Pacific

Asia-Pacific has undergone a profound transformation over the past few decades, increasing its share in global trade and GDP. This paper assesses to what extent Asia-Pacific’s role in global finance has expanded commensurately and whether it has become more integrated by systematically analyzing crossborder financial data. We combine descriptive analyses of past trends in financial positions with network analysis to understand how inter- and intra- regional financial linkages have evolved for economies in the region. We find that Asia-Pacific’s role in global finance still significantly lags its role in global trade and that there is considerable heterogeneity within the region. Advanced economies in the region are well integrated into global financial markets, whereas most emerging markets exhibit more limited integration. Financial integration within the region is also low but diverges significantly by instrument. Intra-regional financial integration is advancing in foreign direct investment (FDI) and cross-border banking (the latter from low levels), but has remained limited in foreign portfolio investment (FPI). Gravity model analysis indicates a significant association between trade and FDI, but not between trade and FPI. We conclude the paper with policy recommendations to promote resilient financial integration in Asia-Pacific.