Stephen Roach (from Beijing)
Hope springs eternal out here in the Far East -- even in the depths of unprecedented crisis. Nearly two weeks into a five-city tour and the message is clear: There is a growing consensus that Asian financial markets are now on the mend. Fifteen months after it all began, glimmers of improvement are evident in the economies of Thailand, Korea, and even Indonesia. The old-timers in a battered Hong Kong property market sense the early signs of a turn. Aided by a surprising appreciation in the yen, Asian currencies are on the rise -- especially the rupiah, the Sing-dollar, the baht, and the won. Fears of a Chinese devaluation are quickly fading, and the Hong Kong peg suddenly looks firm. The icing on the cake came in the form of last week's surprising Fed easing, followed quickly by gathering interest rate relief throughout Asia. Crisis or not, Asia now believes it will be the beneficiary of the coming turn in the global liquidity cycle. Presto -- the worst must be over.
It's a good story. But Asian-based investors are reluctant to make eye contact with you when they spin this yarn. It doesn't take long to figure out why. With output losses having turned out to be three to four times original expectations, it should hardly be surprising that the rate of decline is moderating. Meanwhile, few believe that the heavy lifting of structural reform has even begun. Having cut their teeth on the boom-bust cycle of asset markets, Asians simply maintain that valuations are finally cheap enough to attract the marginal asset allocator. The cautious -- and, by now, cash-rich -- investor base out here is as cynical as I have ever seen it. That's hardly surprising in light of the extraordinary wealth destruction that has occurred in the past year. Nevertheless, Asian investors are more than willing to play the coming bounce -- even though few believe it will have any real staying power.
In the 35 meetings that Byron Wien and I held with investors in Singapore, Hong Kong, and Tokyo, three recurring themes were evident. Not surprisingly, the hedge fund issue was at the top of the agenda -- it came up in every single meeting. There was general concern that the Long-Term Capital Management episode was only the tip of a new and dangerous iceberg. There is great fear that global deleveraging has a good deal further to run. There was also a strong critique of American hypocrisy on this point. Asians have little tolerance for the distinctions we tried to make between bailouts and workouts. One insider went so far as to say that the recently enacted Japanese bank reform package would have had more teeth, were it not for America's double standard on the "too big to fail" doctrine. Touché.
A second theme was the fear of unexpected recession in the United
States. A strong yen was viewed as helpful to Asia, but its impact paled in comparison to potential perils in the state of global demand. Fears of a credit crunch and a spontaneous collapse in business capital spending were widely perceived to be the main risks to the US economy. Concern about the wealth effect and its impact on consumer demand was also widespread. Without the American locomotive, the view is widespread that any hopes for an Asian recovery would quickly be dashed. Considerations over volume growth (i.e., GDP) are of far greater importance than any comfort over price (i.e., currency). Our no-recession call for the US economy in 1999 was challenged everywhere we went.
The sad state of the Japanese economy was a third unifying theme of
this trip. Economic recovery in Japan is widely perceived to be out of the question until late 1999, at the soonest. Few in Japan were enthusiastic about the recent bank bailout. While large in size, it was depicted as lacking in substance; the best that could be said about these measures is that they provided a "framework" for future actions. Most Asian-based investors still believe that as the region's largest economy, Japan will play a defining role in shaping recovery in Asia. I challenged them on this point, arguing that Japan's share of Asian exports (12%) is now below that of the US (21%) and Europe (15%); I also pointed out that Japanese foreign direct investment into Asia had been on the downswing as a share of the region's GDP. And I urged them to consider the Asian record of the 1990s -- nearly 8% average GDP growth over the 1992-97 severval, at the same time that the Japanese economy was inching along at only about 1%. Asians were generally unpersuaded by this argument. As Japan goes, they maintain, so goes the rest of the region.
There's a grim sense of resignation in the air out here in Asia. No one wants to miss a pop in these depressed markets, but few believe it will be lasting. It's getting tougher and tougher to make the distinctions in Asia. The mood in Singapore -- long a special enclave of Asian prosperity -- was as bleak as I have ever seen it; trapped between Indonesia and Malaysia, there is a gathering sense of despair in this once proud city-state. In a few hours, I will arise in Beijing, the last bastion of Asian resilience. China has defied the doomsayers in 1998. But the real test of this nation may still lie ahead. As the Asian crisis has evolved into a full-blown global crisis, China must now come to grips with a very new set of challenges. And so must the rest of us. |
