Business cycles in the emerging economies of Asia have been correlating more strongly with those of China in recent years, Asian Development Bank’s economist tells StrategicRISK.

Nevertheless, says principal economist with the Asian Development Bank’s (ADB) Office of Regional Economic Integration Lei Lei Song (pictured), the degree of output co-movements remains strong between emerging Asian economies and Japan.

“In other words, south-east Asia is very much linked to both Japan and China,” Song said

Speaking to SR while the 47th annual meeting of ADB’s board of governors is being held in Kazakhstan, Song added that Asia-Pacific’s trade share with other emerging markets outside the region continued to rise.

His comments follow the release of the ADB’s Asian Economic Integration Monitor, a semi-annual review of Asia’s regional economic cooperation and integration. The latest review indicates that economic growth in Japan, South Korea and ASEAN countries is increasingly correlated to China.

The head of the ADB’s Office of Regional Economic Integration Iwan J. Azis said that Asia needed stronger cooperation now more than ever.

“Regional trade and financial integration have ratcheted up over the past decade, and closer cooperation is needed to counter geopolitical risks while surveillance and financial safety nets can address contagion,” he said.

The review suggests that financial integration also continues to deepen, with an increase in cross-border equity and debt holdings, as well as foreign direct investment. Intraregional bank credit flows – particularly from Japan and Australia to other Asian countries – is emerging as an important source of stable external financing.

South-east Asian nations are attracting more foreign direct investment from within the region and from east Asia, strengthening production networks as the region gears up for the establishment of the ASEAN Economic Community in 2015. For example, businesses from Japan, the biggest foreign investor in south-east Asia, are increasingly shifting their production chains to the region.

ADB ‘must transform’

At the annual meeting of ADB’s board of governors, which concludes today (May 5), ADB president Takehiko Nakao said that while the Asia-Pacific was “the most dynamic region in the world”, poverty remained a huge impediment to its development.

“There are still many challenges to tackle – traditional ones and emerging ones,” Nakao said.

“As the largest development institution based in Asia, ADB must also transform to meet these challenges with reforms and innovative solutions.”

More than 1.6 billion people in the region live on less than $2 a day. They remain vulnerable to sudden, unexpected shocks such as job loss or crop failure. A huge infrastructure gap, environmental degradation and climate change, and the untapped potential of regional cooperation and integration also need to be addressed.

Nakao emphasised the importance of good infrastructure such as roads, power, and water in promoting inclusive growth.

“Such infrastructure is essential for people to go to hospitals and schools,” he said.

“It also improves access to jobs and markets, thereby helping more people out of poverty.”

The ADB has proposed combining the lending operations of its Ordinary Capital Resources with those of the Asian Development Fund (ADF).

Nakao said that, if approved, the proposal would “allow us to increase our lending capacity, and enhance support for low-income countries while reducing the burden on ADF donors”.

“It would also better position ADB to respond to any future financing needs including for natural disasters and economic crises,” he added.