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Financial Integration in the Asia-Pacific: Fact and Fiction

The Asia-Pacific region is arguably the most important region of our time. The Asia-Pacific — incorporating Northeast Asia, South Asia, Southeast Asia and Oceania — covers 30 per cent of global landmass, contains 60 per cent of the world’s population, and contributes more than 30 per cent of global economic output. It is also deeply integrated with the global economy, accounting for over 30 per cent of the world’s merchandise exports.Australia has participated in, and benefitted from, the rise of Asia. Four of Australia’s top five two-way trading partners are now in the Asia-Pacific region. Of the five million overseas-born people living in Australia, almost two million were born in the Asia-Pacific — an increase from just 276,000 in 1981. Close to one in ten of Australia’s population identifies with Asian ancestry. Strong growth in the Asia-Pacific region, particularly in China, has had a profound impact on the Australian economy over the past decade. At the diplomatic level, Australia has re-oriented itself toward the Asia-Pacific through fora like APEC and a strategic partnership with ASEAN, through the promulgation of free trade agreements with major trading partners in Asia, and via the concentration of embassies and aid funding within the region relative to the rest of the world. Australia is the second largest aid donor to the region, and by far the largest to the Pacific Islands subregion.This report examines the extent to which Australia’s deepening economic and political relationship with the Asia-Pacific region is reflected in the financial services industry — in other words, the degree to which economic and cultural connectedness has led to financial connectedness, or financial integration. It also examines the extent to which the Asia-Pacific has become more financially integrated both intra-regionally and with the rest of the world.What we find is that the financial services sector is growing quickly in the Asia-Pacific region, and becoming more integrated across borders. Australia’s financial connectedness appears to be lagging this growth; while Asia represents roughly two-thirds of Australia’s global trading relationships, it still accounts for less than one third of Australia’s cross-border financial relationships.