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Asia may emerge unruffled by rout

The area's economy looks solid despite export worries.

August 18, 2007|Don Lee | Times Staff Writer

shanghai -- Judging by the plunges in Asian stock markets this week, you might think lenders in this part of the world were sitting on a pile of Made-in-America sub-prime debt. Their direct exposure to the mortgage woes in the U.S. looks small, though, and many banks in the region, even those lumbering Japanese ones, are better capitalized and more fit today than they have been in a long time.

Yet that didn't matter much to stock traders. Asia's markets were among the hardest hit anywhere as investors dumped shares in the last three days amid fears that the U.S. housing debacle would slow economic growth. Friday's move by the U.S. Federal Reserve to cut a key rate it charges banks triggered a rally on Wall Street but was too late to prop up Asian markets, which had closed hours earlier.

The Fed action is likely to give a boost to Asia as well, after several days of what portfolio managers called panic selling. "The overall sentiment is very bad," said Lim Chang-gue, a fund manager at Samsung Investment Trust Management in Seoul, after South Korea's benchmark index tumbled nearly 7% on Thursday.

The next day, the Korean market fell a further 3.2%. Japanese equities took an even harder pounding Friday: The Nikkei 225 stock average plunged 5.4%, the biggest single-day percentage decline in six years. That brought its losses over the last three days to nearly 10%.

Despite the rout this week, most analysts are cautiously optimistic about Asia's economic prospects. Unlike a decade ago, when the Asian financial crisis exposed severe weaknesses in corporate finances, the region's economic foundation today appears solid, with lower private- and public-sector debt levels and stronger national currencies and trade accounts.

China has been a big part of that story. Its neighbors have roundly benefited from its boom, and collectively they now rely less on the U.S. economy. The upshot is that any shocks from weaker U.S. growth should be easier for Asia to weather.

In the short term, the change in investors' sentiments this week suggested an end to the flow of easy money (much of it borrowed in Japan) that had lifted Asia's markets. The global credit crunch also could hold up some business deals and development projects. And in the view of some analysts, underlying the market turmoil are signs of deeper troubles ahead, particularly in Japan.

The Nikkei's severe loss Friday was attributable largely to the strengthening of the Japanese yen. A stronger yen makes Japanese exports more expensive to consumers overseas. That by itself won't hurt global companies such as Toyota Corp., which produces many vehicles in the U.S. and is savvy about hedging against currency fluctuations. But Kirby Daley, a Japan strategist at Societe Generale's Fimat brokerage, says it raises concerns about the underlying strength of the world's second-largest economy.

Despite more than two years of economic growth, Japan is struggling with deflation. Wages have sagged and consumers are spending less. About the only thing driving the Japanese economy is exports, Daley said, particularly sales to U.S. consumers, who are being pinched by the housing downturn.

"That's going to put the clamp on Japanese companies," he said. "Toyota will not sell nearly as many cars as in the recent past quarters."

Exports are a big driver for South Korea's economy as well, but increasingly those shipments are going to China, not the U.S. In particular, South Korea has become an important supplier of high-tech components used in Chinese manufacturing, said Daniel Melser, an analyst at Moody's in Sydney, Australia.

South Korean banks' exposure to the U.S. sub-prime mortgage troubles is small, about $85 million so far. But Lim and other analysts worry that the home-loan bust will be seen as a harbinger of wider fallout from excesses and imbalances in the global economy, including asset bubbles and the huge U.S. federal deficit. If the U.S. economy takes a big hit, China may not be enough to cushion the blow to South Korea and others.

"If the negative impact done by the sub-prime mortgages is really serious, then the overall economy -- including the U.S., and eventually the Chinese economy and the rest of Asia -- will recede," Lim said.

Few analysts see that scenario emerging at the moment.

"There's nothing that changed the fundamentals in the region," said Prakash Sakpal, an economist at ING Financial Markets in Singapore, rattling off strong economic growth rates -- Singapore 8.6%, Hong Kong 6.9% -- in the second quarter.

Then there's China, which seemed barely fazed by the market turmoil and seems awash in cash. In the last two days, the Shanghai composite index gave up about 4%. But it's still up 78% for the year.

"Forget about the other dynamics" in the world, said Andy Xie, a Shanghai-based economist, laughing. "We have our own game here."


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