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Slump in exports turns Asian tiger into pussycat

Flagging demand from trading partners leads to lower earnings and higher unemployment.

October 11, 2008|Don Lee and John Glionna | Times Staff Writers

SHANGHAI — If there was any question about Asia's exposure to the U.S. financial contagion, this week left no doubt.

Japan's stock market crashed, South Korea's currency convulsed and Singapore said it was in recession. Suddenly, Asia doesn't look to be the strong cushion that some had counted on to soften the falling global economy.

Although Asia has suffered relatively little direct effect from toxic American mortgage-backed securities, a global downturn is proving a drag on exports, the lifeblood of many Asian economies. Slumping demand from the U.S. and Europe is crimping corporate earnings and leading to higher unemployment.

"I think the good times are over for Asia," said Masaru Hamasaki, a strategist for Toyota Asset Management in Tokyo, as he watched the Nikkei stock index plunge 9.6% on Friday, an even steeper drop than the 9.4% slide on Wednesday that was the worst in more than two decades. The catalyst for the sell-off was the losses on Wall Street, but the Nikkei was also dragged down by bankruptcy filings Friday by a life insurance company and a real estate investment trust in Japan.

While Japan's economy has been plodding along, the last few years have been one big economic party for much of the rest of Asia. Fueled by China's spectacular growth and American consumers' insatiable demand, the region's exports of commodities, computers and clothes soared. Asian currencies largely appreciated, and foreign capital inflows pushed stocks to stratospheric levels.

Not anymore. With foreign investors retreating, stock markets in the region have suffered some of the worst drops worldwide. Indonesian authorities indefinitely halted trading Friday after two days of 10%-plus declines. Currencies have fallen, most notably in South Korea. Singapore joined New Zealand in entering recession; experts say Japan is probably there already and Hong Kong not far behind.

"The world is caught up in a financial storm, and dark clouds fill our immediate horizon," Singaporean Prime Minister Lee Hsien Loong said Friday. Singapore's economic activity shrank 6.3% in the third quarter on an annualized basis, after falling nearly as much in the second. The key culprit, analysts said, was reduced output of electronics, pharmaceuticals and other goods.

The story of weakening manufacturing is the same everywhere. Even in China a growing number of factory owners are reporting drop-offs in overseas orders.

Gong Pinzhong, an exporter of picture frames in Yiwu, south of Shanghai, says three of his customers from the U.S. recently went bankrupt. They owe Gong about $500,000. He now demands payment before goods are shipped. He has already cut 400 workers because of falling sales.

China's economy, while slowing, is still expected to grow at a rapid pace as Beijing steps up spending for infrastructure and support for ailing export industries. Asians also can take heart that their banks are generally well capitalized, corporate balance sheets are solid and governments are sitting on mountains of foreign reserves.

South Korea has been one of the hardest hit Asian countries in the current crisis. Its currency fell this week to its lowest level in 10 years and has lost more than 25% against the dollar since August amid concerns about debt-bloated banks and a deteriorating economy.

President Lee Myung-bak railed against currency speculators. Although many banks have a high loan-to-deposit ratio, regulatory filings indicate that they are curbing loan growth and are not saddled with a lot of troubled loans.

Analysts said the sharp fall in the Korean currency, the won, reflected the global credit crunch as well as a scramble for dollars to cover foreign-denominated debt and certain currency hedging schemes used by some Korean firms.

"It's true that the situation among South Korea's local banks wasn't good, but it was a globally common phenomenon," said Ahn Byung-chan, director general of Bank of Korea's international department, referring to lenders worldwide hoarding cash and refusing to lend to one another.

Michael Breen, a consultant in Seoul and author of "The Koreans," doesn't see a repeat of the 1997 Asian financial crisis, which brought massive bankruptcies, layoffs and other upheaval. "A lot of men who lost their jobs pretended to work," he said of that period. "A lot of them would change out of their suits and go hiking for the day while their families thought they were at the office."

Today, he added, "there's less overriding fear among Koreans that their economy is going to go under. People look to their government to come to their assistance like it has done in the past."

This week, central bankers in South Korea, Australia, Taiwan and China joined the U.S. and the European Union in cutting interest rates. Until recently, most central bankers in Asia were raising rates to rein in inflation. Now they're loosening credit to encourage growth.

"It's almost like banks had to back-flip," said Nikhilesh Bhattacharyya, a Southeast Asia analyst at Moody's in Sydney.

With lower exports on the horizon, he said, many Asian governments are trying to bolster domestic demand. But depreciating currencies and falling stock and property markets -- not to mention rising joblessness -- could keep many people from opening their wallets. Bhattacharyya says that in some of the Southeast Asian countries he covers, consumers are still flush from the good years. People who put funds in Indonesia's stock market in 2004 saw their investments grow sevenfold by the end of last year, he said.

"Over the long term," he said, "I'm not pessimistic."


Lee reported from Shanghai and Glionna from Beijing. Times researcher Youkyung Lee in Seoul contributed to this report.

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