2008.4.12 Park Bun Soon (Senior Fellow, SERI)

1. Impact of Financial Turmoil Impact of Financial Turmoil on East Asia on East Asia 2008.4.12 Park Bun Soon (Senior Fellow, SERI)

2. Deteriorating credit market Huge write-downs at major financial institutions holding securitized subprime mortgages IMF estimates the aggregate potential loss originated from sub-prime loan amounts US$945(April 8, 2008) Declining US housing prices  heavier household and corporate debt burdens  a slowdown in private consumption and domestic companies’ investment (including facilities investment) The financial sector: soaring US subprime-related losses  worsening global credit crunch and shrinking wealth US Fed’s rate cuts to prop up economy further weakens dollar Benchmark rate cut from to 2.25% from 5.25% since August 2007 Discount rate cut to 2.5% from 6.25% US financial measures are not enough to address global credit crunch fundamentally Subprime mortgages rate resets will peak in the first half of 2008 and thus further raise number of potential foreclosures However, uncertainties in global financial markets are expected to ease in the second half of 2008 Developments in the Wake of the US Subprime Mortgage Crisis

3. Increasing signs of looming recession in the US economy 2007 fourth-quarter growth was 0.6% (Annualized growth rate compared to the previous quarter). Sales of new homes in February sank to a 13-year low. Non-farm sectors shed 80,000 in March 2008 (1st-quarter total 230,000), the unemployment rate was 5.1%. The growth rate for February 2008 retail sales was -0.6%. The US Economy Tipping Toward a Recession 【Trends in US Major Economic Indices】 Note: 1. Real GDP (the annualized rate) and retail sales are quarter-on-quarter growth rate. 2. Existing and new housing sales are year-on-year growth rate. Source: BEA, BLS, US Census Bureau

4. Major currencies appreciated against US dollars Korean Won depreciated recently because current account deficits Export competitiveness is deteriorating along the appreciation of currencies Yen Yuan Won Weak Dollar 【 Exchange rate of major currencies 】 (%) 10 5 0 -5 -10 -15 2006 2007 2008 -20 2 3 10 11 12 1 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9

5. 【China’s Export to World and US】 World US 35.1 35.4 30.4 28.4 27.2 25.7 24.9 16.8 14.4 0.3 2004 2005 2006 2007 2008.1~2 US imports from East Asia are sagging • US imports have been declining since 2005 • The growth in US imports fell to 5.3% in 2007 from 13.7% in 2005. • US imports have a huge influence on the ASEAN regions • The exports from Malaysia and Thailand to the US have been lackluster • China’s export growth is stagnating • Largely due to a drop in exports to the US, China’s export growth fell to 16.8% in 2007 from 25.7% in 2006 【US import growth rates from East Asia 】 (%) Source: US trade statistics

6. Sanghai Comp(p) KOSPI(p) Nikkei225(p) Stock markets in East Asia 【Stock market performances in Korea, China, and Japan】 • Capital flight from emerging markets inAsia • Increased risk-aversion toward emerging markets • Uncertainty is rising over East Asian currencies and asset prices • Volatility has increased in East Asia stock markets • The Shanghai index was down 43.8% on April 2 from its 2007 high 250 200 150 100 50 2007 2008 0 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 01 【Stock purchasing of foreign investors】 ( US million $)

7. Forecast of East Asian economies 【Forecast of economic growth rates 】 • Growth forecasts of major world economies have been slashed. • Goldman Sachs cuts its forecast for US economic growth to 0.9% in March 2008 from 1.8% in October 2007. • East Asian outlook remains bright • Economic growth of the region remains relatively high, although it’s lower than 2007 • Export-driven Singapore, Malaysia, the Philippines are suffering sharp slowdown 【Growth rates of East Asia】

8. 【China’s import growth rates】 (%) Total import Japan Korea Taiwan US 50 40 30 20 10 0 2004 2005 2006 2007 2008.1~2 Role of China in East Asia • As a market China’s role is increasing • For Korean and Taiwan, China is No 1 market • 6 ASEAN countries’ share of China is 10.3% • China’s import from East Asia is still OK • Up to Feb. 2008, China’s total import increased rapidly • Imports from Japan and Taiwan increased by 20.8% and 26.6%, respectively, topping 2007 【Export linkages to China and US(2007) 】 Note: In case of export shares of ASEAN is as of September 2007, and indicates 6- industrialising countries

9. What is the problem and implication for the financial cooperation? • From Decoupling to Recoupling • In real sector, it is clear that East Asia’s dependence upon the US has been decreasing rapidly . Despite the drop in US import demand, East Asia may continue to grow with the regional cooperation • However, recoupling is occurring in spite of lower dependence on the US market • Over sensitivity to financial market turmoil • Globalization of financial sector is much more volatile than trade and investment • As long as the international financial market is dominated by Western financial capital, East Asia cannot have true decoupling • Learning new financial techniques and financial cooperation are urgently needed • East Asia’s portfolio of US financial assets is mainly US Treasury bonds in contrast to European equities.

10. East Asia’s US Securities asset holding and Foreign Reserves as of June 2007 ( US 100million $, %) Sources: US treasury and ADB