There's no cause for US optimism
By Peter Hartcher, Asia-Pacific Editor
"The world of high finance can be understood," wrote American economic
thinker John Kenneth Galbraith, "only when it is recognised that the
greatest admiration is accorded those who are paving the way for the
greatest catastrophe."
There is an unshakable optimism, so steady that it appears to be genetic
in origin, among some of Wall Street's most admired strategists, such as
Goldman Sachs' Mr Abby Cohen and Morgan Stanley's Mr Byron Wein.
Their optimism is credited with exerting a stabilising influence on US
stock prices after Tuesday's Asia-inspired sell-off.
The basis of this fixed-grin approach to investment advice is twofold;
it is to say that Asia's outlook is not as bad as you think, and that,
hell, Asia isn't so important to the US economy anyway.
Both propositions are flawed.
The Asian crisis is probably only at half-time. There is a good deal
more bad news yet to emerge from the stricken continent, particularly
from its two biggest economies, Japan and China.
Astonishingly, the general perception of China's economy is that it is
still growing robustly and that the Government's target of 8 per cent
expansion this year is plausible.
Even if China's GDP statistics are compiled accurately, this is a
seriously misleading indicator.
There are still chunks of China where peasants are being brought out of
the barter economy and into the money economy for the first time. The
national accounts misrepresent this monetisation of the economy as
growth in production.
Other, more useful, proxies for activity in China show a significant
slowing. The profits of listed Chinese companies have collapsed by about
90 per cent over the past two years.
"China is slowing down significantly, and anyone that's telling you
otherwise probably has some entrenched interest," says the chief
treasury economist for Bankers Trust in Singapore, Mr Alistair Boyd.
"Red-chip stocks [major Chinese firms listed in Hong Kong] have been
getting slaughtered in the last three weeks. That tells you that the
international markets are not comfortable about China's prospects.
"And in the kerb market for dollars in China, the premium for dollars
[over the local renminbi] has been widening. That tells you that the
locals aren't comfortable with China's prospects either."
As for Japan, it has not yet managed to put in place the prerequisites
to reverse its downward spiral of deflation. The International Monetary
Fund has pointed out that in modern economic history no country has
managed an economic recovery with a dysfunctional banking system.
Japan's Government has not yet even drawn up its banking bills, let
alone tried to negotiate their passage through the parliament. And its
plans to stimulate the economy remain just that. In the absence of
drastic policy action, the yen continues to weaken and exert more
downward pressure on other Asian currencies.
This, in turn, worsens Japan's economic and banking crisis. For example,
Nomura's Mr Richard Koo estimates with every 5 fall against the US
dollar, banks are forced to cut credit by another 1 per cent of GDP. And
what of the view that Asia doesn't matter so much to the US?
"If I told you," says the chief economist for Chase Manhattan Bank in
New York, Mr John Lipsky, "that the US would fall from 3 per cent growth
this year to -2 per cent next year, would you say that would affect
global growth?
"Of course you would. Well, it's already happened - that's the scale of
what has happened in Asia."
You can't lightly dismiss the puncturing of the world's major growth
zone of the first seven years of the 1990s. Unless, of course, you are
paving the way for greater catastrophe.
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