Business Times - 28 Jul 2009
By WILLIAM PESEK JR
HATS off to officials in Seoul. South Korea's ability to expand at the fastest pace in almost six years is some of the best news Asia has had in a long while. It's a sign that even with the US$14 trillion US economy in chaos, Asia is beating the odds and holding its own.
For now, at least. The region can't be complacent for two reasons. One, increased spending and low interest rates are fine for the moment, yet they don't replace a return of global demand. Two, loose policies may be doing more to fuel bubbles that merely provide the illusion of economic recovery, leaving Asia even more vulnerable to further problems in markets.
The 2.3 per cent growth Korea generated in the second quarter dovetails with optimism that East Asia's rebound from the global crisis may be 'V-shaped', not U-shaped or W-shaped. The Asian Development Bank said just that in a report last week. It recommended that central bankers retain expansionary monetary policies even as risks to recovery dissipate.
That's just what worries me, and China is a case in point. Mark Matthews, Asia-Pacific strategist at Fox-Pitt Kelton in Hong Kong, isn't exaggerating when he calls China 'a bubble in the making'. His concern is that massive stimulus efforts are 'being misallocated into equities, something the authorities cannot be happy to see'.
Headlines about China's booming equity markets may score points with investors and consumers. It's not a long-term cure-all for what ails Asia's second-biggest economy. Surging stocks don't get China any closer to reducing its reliance on exports. They're also largely supported by government largesse funded by debt - something that can't be sustained over time.
It's an Asia-wide phenomenon. Signs of life in the region's economies are compliments of massive stimulus efforts that will become less potent as time passes. That will put the onus on central banks to trim interest rates to support markets. Again, this is a short-term fix, not a long-term solution. It will only lead to new asset bubbles that look like economic growth.
In a sense, optimism about a V-shaped recovery in Asia is becoming a bubble all on its own. China State Construction Engineering Corp, for example, owes Beijing a debt of gratitude. The government's stimulus efforts paved the way for it to raise US$7.3 billion in Shanghai last week. It was the world's biggest initial public offering in 16 months, and its success is among the reasons Asian equities had a great week.
In Korea, Samsung Electronics on Friday joined exporters Hyundai Motor and LG Electronics in reporting that profit surged last quarter, helped by demand fed by US$2.2 trillion in stimulus worldwide and a weaker currency.
The question is, are investors responding to a real rebound in Asian growth or the illusion of recovery fuelled by public spending? The MSCI Asia Pacific Index has rallied 53 per cent from a five-year low on March 9. What investors are missing is that once the high from those actions wears off, there may not be enough largesse in the pipeline to offer stimulus-addicted investors another fix.
That's not to detract from Korea's success. Eight months ago, traders were wondering if Korea's debt exposure would have Asia's fourth-biggest economy going the way of Iceland. Today, the speculation is over whether the Bank of Korea will be among the first major Asian central banks to begin raising interest rates.
Yet, Asia's economies are still too much about the US consumer. As long as US unemployment keeps climbing, Asia's outlook will remain uncertain. Even a China bull like Jim Rogers, chairman of Rogers Holdings in Singapore, will admit that it's 'impossible' for Asian economies to decouple from the US and Europe anytime soon given their relative sizes.
That really makes you wonder about the speed with which markets are advancing. Stocks in Shanghai are up 85 per cent this year. They're up 83 per cent in Jakarta, 61 per cent in Mumbai, 51 per cent in Taiwan, 43 per cent in Singapore, 41 per cent in Manila, 40 per cent in Bangkok, 39 per cent in Hong Kong and 35 per cent in Seoul.
Such moves have many wondering why stocks in Tokyo appear to be lagging. Perhaps the 7.4 per cent rise in the Nikkei 225 Stock Average this year is more reflective of Asian reality than the region's other bourses.
The need to retool economies away from exports towards domestic demand has never been greater. The Dow Jones Industrial Average being above 9,000 doesn't alter the basic calculus. Confidence among US consumers fell in July for the first time in five months as mounting unemployment and stagnant wages shook households. That's what matters to Asia, not buoyant stocks.
The author is a Bloomberg News columnist.
The opinions expressed are his own
By WILLIAM PESEK JR
HATS off to officials in Seoul. South Korea's ability to expand at the fastest pace in almost six years is some of the best news Asia has had in a long while. It's a sign that even with the US$14 trillion US economy in chaos, Asia is beating the odds and holding its own.
For now, at least. The region can't be complacent for two reasons. One, increased spending and low interest rates are fine for the moment, yet they don't replace a return of global demand. Two, loose policies may be doing more to fuel bubbles that merely provide the illusion of economic recovery, leaving Asia even more vulnerable to further problems in markets.
The 2.3 per cent growth Korea generated in the second quarter dovetails with optimism that East Asia's rebound from the global crisis may be 'V-shaped', not U-shaped or W-shaped. The Asian Development Bank said just that in a report last week. It recommended that central bankers retain expansionary monetary policies even as risks to recovery dissipate.
That's just what worries me, and China is a case in point. Mark Matthews, Asia-Pacific strategist at Fox-Pitt Kelton in Hong Kong, isn't exaggerating when he calls China 'a bubble in the making'. His concern is that massive stimulus efforts are 'being misallocated into equities, something the authorities cannot be happy to see'.
Headlines about China's booming equity markets may score points with investors and consumers. It's not a long-term cure-all for what ails Asia's second-biggest economy. Surging stocks don't get China any closer to reducing its reliance on exports. They're also largely supported by government largesse funded by debt - something that can't be sustained over time.
It's an Asia-wide phenomenon. Signs of life in the region's economies are compliments of massive stimulus efforts that will become less potent as time passes. That will put the onus on central banks to trim interest rates to support markets. Again, this is a short-term fix, not a long-term solution. It will only lead to new asset bubbles that look like economic growth.
In a sense, optimism about a V-shaped recovery in Asia is becoming a bubble all on its own. China State Construction Engineering Corp, for example, owes Beijing a debt of gratitude. The government's stimulus efforts paved the way for it to raise US$7.3 billion in Shanghai last week. It was the world's biggest initial public offering in 16 months, and its success is among the reasons Asian equities had a great week.
In Korea, Samsung Electronics on Friday joined exporters Hyundai Motor and LG Electronics in reporting that profit surged last quarter, helped by demand fed by US$2.2 trillion in stimulus worldwide and a weaker currency.
The question is, are investors responding to a real rebound in Asian growth or the illusion of recovery fuelled by public spending? The MSCI Asia Pacific Index has rallied 53 per cent from a five-year low on March 9. What investors are missing is that once the high from those actions wears off, there may not be enough largesse in the pipeline to offer stimulus-addicted investors another fix.
That's not to detract from Korea's success. Eight months ago, traders were wondering if Korea's debt exposure would have Asia's fourth-biggest economy going the way of Iceland. Today, the speculation is over whether the Bank of Korea will be among the first major Asian central banks to begin raising interest rates.
Yet, Asia's economies are still too much about the US consumer. As long as US unemployment keeps climbing, Asia's outlook will remain uncertain. Even a China bull like Jim Rogers, chairman of Rogers Holdings in Singapore, will admit that it's 'impossible' for Asian economies to decouple from the US and Europe anytime soon given their relative sizes.
That really makes you wonder about the speed with which markets are advancing. Stocks in Shanghai are up 85 per cent this year. They're up 83 per cent in Jakarta, 61 per cent in Mumbai, 51 per cent in Taiwan, 43 per cent in Singapore, 41 per cent in Manila, 40 per cent in Bangkok, 39 per cent in Hong Kong and 35 per cent in Seoul.
Such moves have many wondering why stocks in Tokyo appear to be lagging. Perhaps the 7.4 per cent rise in the Nikkei 225 Stock Average this year is more reflective of Asian reality than the region's other bourses.
The need to retool economies away from exports towards domestic demand has never been greater. The Dow Jones Industrial Average being above 9,000 doesn't alter the basic calculus. Confidence among US consumers fell in July for the first time in five months as mounting unemployment and stagnant wages shook households. That's what matters to Asia, not buoyant stocks.
The author is a Bloomberg News columnist.
The opinions expressed are his own
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