Impacts of U.S. Interest Rate Hikes and Directions of Monetary and Financial Cooperation in the APEC Region

During the U.S. QE period, capital inflows took place in the Asian region; in particular, enormoU.S.ly in China, Korea, Malaysia, the Philippines, and Thailand, As a result, during the U.S. QE period, currencies in Singapore, Malaysia, Thailand, and China appreciated. In terms of real effective exchange rate (REER), currencies in China, Philippines, Korea, Singapore, and Thailand appreciated. Thus., during the U.S. QE period, the current accounts in China, India, and Indonesia deteriorated. During the U.S. QE period, reserves in China, Korea, India, Singapore, Malaysia, Thailand, and Indonesia accumulated. However, external debts also rapidly increased. As a result, ‘reserves-external debts’ rapidly deteriorated. In summary, during the U.S. QE period, external resiliency in terms of ‘reserves-external debts’ and the current account became fragile or weak in Asia. As the U.S. interest rate is now increasing, due to weak or fragile external resiliency in terms of the difference between reserves and external debts and current accounts in Asia, and in anticipation of exchange rate profits, capital outflows may take place in Asian countries similar to the period of January 1994 to February 1995, and May 2004 to July 2007, both of which resulted in foreign currency crisis in Asian countries. Accordingly, most Asian countries must prepare sufficient foreign currency liquidities and make efforts to improve current accounts. In addition, in order to prevent the recurrence of financial crisis originating from asymmetric monetary policies in the region, effective monetary and financial cooperation systems in the APEC region must be introduced.