Hello All (especially Zev and Mason). I thought I would give an update of the current Asian situation. I might wait a bit before stepping in front of that train, Zev.
What you're seeing in Asia now is the realization that (1) the problems here are broad (systemic) and deep, and (2) that there are not going to be any quick fixes. I don't think any real new news is making it into the market, except that acceptance of reality may be new news here. Prior to the last week, there had been a consistent denial of that reality across the entire region. Denial is such a way of life in Japan that that may be the one place where they can continue to live in the fantasy that everything is going to be OK without real reform, although even there those with their feet on the ground see the writing on the wall. I thought I would go through a quick country-by-country account of where I see things and the dangers present now.
Indonesia - Let's begin with the real cesspool of the region, and I must start by saying that the fact the Suarto is gone and Habibe is in means nothing. Habibe is completely a creature of Suarto, as the student demonstrators know full well. On the plus side, though, is the fact that it is really the IMF that now runs the country. That much is clear. If Habibe does not do as the IMF says, they pull the chain on the bailout money, the country collapses economically within 24 hours, the demonstrations resume full force and Habibe will be gone even quicker than his boss, so politically, he has no choice but to do as the IMF dictates. How farsighted they are with the implementation of the reforms and how quickly the country can be put back on sound economic footing is anybody's guess.
Malaysia - This is the new major league trouble spot. It was announced toward the end of last week that Malaysia is on the way to a full scale economic recession. This is in addition to the the ongoing collapse of the property market there due to a large overcapacity situation. What is not clear with both Malaysia and Indonesia is the degree to which loans in the now nonperforming category in both countries are held by foreign, particularly Japanese banks. It has been announced recently (last week) by the largest banking concern in Hong Kong that they were going to have to increase their provision for loan losses due to the situation in Malaysia, and Hang Seng bank followed suit yesterday or Friday. Bank stocks have been hit hard here as a result. There is also fear in the region that if the Malaysian economy melts down quickly, there will be a boat people exodous of staggering proportions.
In Hong Kong, in addition to the banking news just related, there has been an announcement Friday that the economy is not just going to slow down, it is going to contract (negative growth) this coming year. Any recovery or upward swing in economic growth is now thought to be a least a full year away and quite possibly longer. Tung Chee Whah is blaming it on Japan, so the search for scape goats has begun. The property sector has begun taking on Spartan measures to stem the tide: flats are going on sale at cost, projects have been slowed or shelved, price wars on new flats are happening, a woman fainted yesterday at a demonstration because the price (value) of her flat fell from 2.8 mil. to 2 mil. in the last two months. There have been a lot of layoffs here, new graduates cannot find a job anywhere, and small brokerage and securities houses are beginning to collapse since investors are staying out of the market and so their commissions have dried up.
South Korea - This is a real area of concern at the moment due to the labor unrest there. If the workers take SK off of the IMF reform track, it will mean another severe downturn in that economy.
China: Everyone wonders now what the Chinese will do with respect to the value of the Yuan. I have discussed this before, and I continue to believe that they will hold out as long as they can in an attempt to get admittance to the WTO, but in the end they will devalue out of necessity. There is going to be massive inflation this Summer and Fall here. That, and the fact that the Japanese will continue to promote the devaluation of their currency to help their export trade will lead to a new round of currency devaluations. I believe that there are limits to which the Chinese can allow their export trade to suffer at the hands of continually cheaper neighboring foreign goods, if they want to keep their own program of dismantling the inefficient state-run enterprises on track, which is their number one economic goal. They cannot have the entire work force laid off, and in the end I think they will devalue. That will lead to more hardship in places that already have experienced plenty of hardship.
Japan: I always like to save the best for last. I have not seen one meaningful bit of reform to change or make competitive the Japanese banking sector. Hashimoto has cut one deal with the banks after another, mostly designed to help alleviate the strain of the bad debts (a) with public money of some kind - details to be worked out later, and (b) so that they do not have to recognize publicly the amount of bad debt in their loan portfolios. All of this seems clearly intent on merely trying to ride out the storm with the "Japaneseness" of the banking sector in tact. Again, I don't know how precarious the situation in that sector is because I don't know the degree of exposure to the bad debt of neighboring countries. By the way, the new currency troubles coming as a result of the inflation that will soon be recognized will of course lead to still more bankruptcies in those countries, etc. IE - what happened last September and October could repeat in many of these countries again this Summer. That is the truly worrying thing about the situation of the Japanese banking sector. How much foreign collapse can it stand.
I don't know what all of this means for semiconductors, except to say that the situation with respect to the asian flu has some more downside. Taiwan sailed through the first round of trouble with remarkably good results. We'll see about round two. But the real problem with a round two is what it means to SK and Japan. In addition, there may be some trouble with the fracturing of the domestic PC market that I haven't fully digested yet. I can only comment on the economic situation in Asia, and it is still grim, and going to become grimmer. No economic indicators here have turned upward yet, and many of them still have large negative slopes. This means that funds for fab construction or refits may very well be hard to come by. For some of you who keep an eye on the oil patch, I have no doubt that the worsening situation here is what is driving down the price of oil as well. I originally thought that the price would have started to rebound by now, but the economic contraction here is continuing. My friends, the squeeze is on.
On a personal note: I will soon be leaving the front. I have accepted a faculty position back in the good ole US of A, and glad will we be to be back.
Jess |
