Asia’s economies

Next stop Asia?

How an American recession might hit Asia

INVESTORS in Asian stockmarkets were until recently big fans of the “decoupling” theory: the notion that Asian economies can shrug off an American recession. This week’s plunge in shares, taking the MSCI Emerging Asia Index down by 25% at one point from its October high, suggests they have changed their minds. But the fact that Asian markets have not decoupled does not necessarily mean that their economies will follow America’s over a cliff.

Decoupling was always a misnomer, seeming to imply that an American recession would have no impact on Asia. In fact exports and hence profits would certainly be reduced. The pertinent argument is that they would be hurt by much less than in previous American downturns.

As well as hitting exports, America’s troubles could affect Asia through various financial channels. Asia’s exposure to the subprime mess is thought to be much smaller than that of American or European banks. Even so, Chinese bank shares tumbled this week on rumours that they would have to make much bigger write-downs on their holdings of American subprime securities. And if stockmarkets slide further as global investors flee from risky assets, this could dampen business and consumer confidence in the region.

Some Asian economies are more vulnerable than others: Singapore, Hong Kong and Malaysia have exports to America equivalent to 20% or more of their GDPs, compared with only 8% in China and 2% in India. There are already some ominous signs. Singapore’s exports to America are down by 11% over the past year, while Malaysia’s fell by 16%. Exports to other emerging economies and to the European Union surged, so total exports still grew by 6% in both economies. But that was much slower than at the start of the year, and the worry now is that demand from Europe has started to flag.

The growth in China’s exports to America slowed to only 1% (in yuan terms) in the year to December from over 20% in late 2006. So far the impact on GDP growth has been modest. Figures on China’s fourth-quarter GDP are to be published on Thursday January 24th and most economists expect growth to slow to a still healthy 9-10% this year.

China’s economy would probably still expand by around 8-9% even if export growth dried up. During the 2001 American recession China’s GDP barely slowed. In contrast, Hong Kong, Singapore, Taiwan and Malaysia suffered full-blown recessions. America’s recession this time is likely to be deeper than in 2001 and Asia is now more integrated into the global economy. Doomsters conclude, therefore, that these economies could be hit harder this time.

The main reason to be more optimistic is that domestic demand (consumer spending and investment) is likely to remain strong and governments have more flexibility. Last year, despite a slowdown in America’s imports, most Asian economies grew faster as domestic demand speeded up. Robert Prior-Wandesforde, an economist at HSBC, says that those who argue that Asian economies cannot decouple from America are ignoring the fact that they already have. Take Malaysia: exports to America plunged, yet its GDP growth quickened from 5.7% at the end of 2006 to 6.7% in the third quarter of last year.

Contrary to the popular view that Asia’s meltdown in 2001 was entirely due to a slump in exports, Peter Redwood, at Barclays Capital, argues that a fall in investment played a bigger role. Firms had too much debt and excess capacity, particularly in the electronics sector, which was at the heart of the American recession. Today firms are in much better shape. Capacity utilisation is high across the region; outside China investment as a share of GDP is low by historical standards; corporate balance-sheets are stronger and real interest-rates are low. Firms are therefore much less likely to slash investment than in 2001.

Macroeconomic fundamentals are also much healthier in East Asia. Large foreign-exchange reserves make countries less vulnerable to foreign shocks. Budgets are in surplus or close to balance, giving policymakers more room for a fiscal stimulus to support growth.

Thus even if Asia’s exports clearly have not decoupled from America, its economies will be hurt less than in the past. Standard Chartered forecasts that emerging Asia will grow by an average of 6.4% in 2008, down from 7.8% in 2007. In 2001 growth dropped by three percentage points to 4.2%. Financial markets were slow to realise that Asian growth and hence the profits of some companies would be dented by an American downturn. But now they risk exaggerating the damage. Economic decoupling is not a myth.

Fed Risks Fueling More Bubbles, Davos Economists Say

Jan. 23 — The Federal Reserve, which yesterday announced its first emergency rate cut since 2001, is ignoring history’s lessons and risks re-igniting more asset bubbles, economists at the World Economic Forum annual meeting said.

The Fed is saying “we are there to clean up after bubbles first rather than to prevent the danger,” Stephen Roach, Morgan Stanley’s Asia chairman, said in a panel discussion in Davos, Switzerland. “It’s a dangerous, reckless and irresponsible way to run the world’s largest economy.”

The Fed cut its benchmark rate by 75 basis points yesterday after stock markets tumbled from Hong Kong to London amid signs of a U.S. recession. The central bank has drawn fire for paying too much attention to economic growth and not enough to asset prices, fueling unsustainable booms in stocks, property and derivatives.

Former Fed Chairman Alan Greenspan was criticized for failing to curb the Internet stock boom of the 1990s and for then fueling further bubbles by cutting rates too much to limit the fallout when equities crashed.

“It’s good for a central bank to ease when the risks are of a crash in the global economy, but that means you have to have a more systematic approach to asset bubbles,” said Nouriel Roubini, founder of New York-based Roubini Global Economics LLC. “If we have a `Greenspan put’ or a `Bernanke put,’ then we will create over and over again a distortion of excessive debt and leverage.”

Counter Argument

The Fed’s cut came a day after the MSCI World Index fell 3 percent, the steepest decline since 2002.

Greenspan and Bernanke counter that it’s too difficult for central banks to spot bubbles before they emerge and raising rates to curb higher housing or stock prices would risk derailing the rest of the economy. Explaining its decision, the Fed yesterday said “broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”

Summers Points at Central Banks on Asset Declines

Jan. 23 — The U.S. Federal Reserve and other central banks are partly to blame for the financial-market slump that’s now threatening to derail the global economy, said investors and former policy makers at the World Economic Forum.

“It’s hard to give central banks a very high grade over the last couple of years on recognition of bubbles and actions taken to address them in the policy or regulatory spheres,” said former U.S. Treasury Secretary Lawrence Summers in a panel in Davos, Switzerland. Billionaire investor George Soros said central banks have “lost control” of financial markets.

The Fed, which yesterday announced its first emergency rate cut since 2001 as U.S. recession fears rose, has been criticized for paying too much attention to economic growth and not enough to so-called asset price bubbles. By cutting rates to protect growth when bubbles burst, the Fed only encourages investors to take bigger risks in the future, said Morgan Stanley’s Stephen Roach.

“It’s a dangerous, reckless and irresponsible way to run the world’s largest economy,” said Roach, chairman of Morgan Stanley in Asia, who was also in Davos.

The U.S. central bank yesterday cut its benchmark rate by three quarters of a point to 3.5 percent a day after the MSCI World Index fell 3 percent, the steepest decline since 2002. U.S. stocks dropped for a sixth day today, the longest losing streak since April 2002.

Mortgage Bust

Fed Chairman Ben S. Bernanke is facing the same objections leveled at his predecessor, Alan Greenspan, who was slammed for not doing enough to prevent the Internet stock boom and then cutting rates too low to limit the fallout.

In 2003, the Fed reduced its benchmark to a 45-year low of 1 percent, leading to a house-price boom that turned to bust in 2006. That prompted a collapse in the market for mortgages to risky borrowers. It’s now derailing financial markets because so many banks bought derivatives linked to those mortgages.

“Central banks lost control of the situation when they allowed financial institutions to develop new financial instruments which they themselves didn’t understand,” said Soros.

Too Difficult

Greenspan and Bernanke counter that it’s too difficult for central banks to spot bubbles before they emerge and raising rates to curb higher housing or stock prices would risk derailing the rest of the economy.

Nor was the Fed alone in slashing rates at the start of the decade. The ECB cut its benchmark to 2 percent in 2003, the lowest since the aftermath of World War II, and the Bank of England reduced its key rate to a 48-year low.

While house prices surged in the U.K., Spain and Ireland, those booms have now withered as contagion from the subprime collapse spreads.

Some Davos attendees came to the Fed’s defense, saying it’s difficult to identify bubbles and more attention should be paid to better regulation.

“We could pierce bubbles but we’d pierce a lot of non- bubbles and take a lot out of gross domestic product,” said John Snow, also a former Treasury Secretary and now chairman of Cerberus Capital Management LP. “We need to reform regulation.”

The ECB nevertheless argues that it may be possible for central banks to “lean against the wind” by raising rates in the early stage of a bubble to head off future gains.

“It’s good for a central bank to ease when the risks are of a crash in the global economy, but that means you have to have a more systematic approach to asset bubbles,” said Nouriel Roubini, founder of New York-based Roubini Global Economics LLC, in Davos. “If we have a `Greenspan put’ or a `Bernanke put,’ then we will create over and over again a distortion of excessive debt and leverage.”

Congress Under Pressure to Move Fast on Stimulus

Jan. 23 — Congress, known for taking months to pass major legislation, is under pressure to enact a stimulus measure within weeks to help keep the U.S. out of recession.

The proposals under consideration — tax rebates, incentives for business investment and increases in unemployment insurance – – won’t have the desired effect if they are delayed, economists said. And if lawmakers load the package up with pet proposals or make it too much more expensive than the $150 billion figure under discussion, it might backfire by boosting inflation or the deficit, they said.

“The timing of fiscal stimulus is critical,” Peter Orszag, head of the Congressional Budget Office, told the Senate Finance Committee yesterday. “If the policies do not generate additional spending when the economy is in a phase of very slow growth or recession, they will provide little help to the economy when it is needed.”

“The sooner the better,” he added.

House and Senate leaders said yesterday they intend to present the president with a bill in the next three weeks. That took on added urgency as global financial markets careened lower in recent days after a decline in U.S. home values and billions of dollars in losses at banks. The Federal Reserve moved quickly yesterday, cutting its benchmark overnight lending rate by 75 basis points to 3.5 percent after an unscheduled meeting.

Virtual Sprint

Three weeks would be a virtual sprint compared with Congress’s usual pace. It took until March 2002 for an economic stimulus plan aimed at recovering from the Sept. 11, 2001, terrorist attacks to be signed into law.

Among the proposals likely to be included in the package are tax rebates of as much as $1,600, tax breaks for businesses to promote investment, an extension of unemployment insurance benefits and more money for the food stamp program.

House Speaker Nancy Pelosi of California said Democratic and Republican leaders agreed with President George W. Bush to get something done “as soon as is legislatively possible.” Pelosi and Senate Majority Leader Harry Reid met with Bush and their Republican counterparts at the White House yesterday.

House Minority Leader John Boehner said he and Pelosi would work out details, including whether rebates will be available to workers who pay no income tax but do have Social Security and Medicare taxes deducted from their paychecks. The White House has assigned Treasury Secretary Henry Paulson with the working out details with the House leadership.


Paulson, Pelosi and Boehner discussed the outlines of a plan at a breakfast meeting today, Boehner said. He said they hadn’t agreed on the details and weren’t sure if a deal would be reached for the president to announce in his State of the Union speech Jan. 28.

“While we want to do this quickly, we want to do it right,” Boehner said, echoing Bush’s words yesterday.

Once Bush signs a bill, it may take the Internal Revenue Service several months to begin mailing rebate checks, Orszag told the Senate Finance Committee. In 2001 it took about 10 weeks to distribute all of the checks included as part of that year’s stimulus package.

“Time is of the essence,” said Jason Furman, an economist at the Brookings Institution in Washington. “The leaders in Congress have been talking about getting this done in 30 days. As long as you keep the bill simple and focused on short-term economic stimulus and don’t get into the broader debate, that’s feasible.”

Christmas Trees

That may be difficult because such bills frequently turn into what are known in Washington as legislative Christmas trees, decorated with lawmakers’ pet proposals.

“Most senators are going to want to add their own little amendments to this bill,” said Pete Davis, an economist who heads Washington-based Davis Capital Investment Ideas and once worked for the Senate Budget Committee.

Reid will “have to make a decision on whether to play ball with Republicans to get a bill out and in doing so fight off people like Mrs. Clinton,” Davis said, referring to New York Senator Hillary Clinton, 60, a Democratic presidential candidate.

Clinton has proposed freezing mortgage interest rates and giving $30 billion in aid to states and cities. Her rival in the campaign for the Democratic nomination, Illinois Senator Barack Obama, 46, has called for an immediate $250 tax cut for American workers, an extra $250 Social Security payment for senior citizens and $10 billion to help people facing foreclosure.

Democrats have majorities in both houses and may want the bill to contain home-heating and foreclosure assistance, among other things, Davis said. Such a bill may take much longer to pass and face a veto threat from the president.

Corporate Tax

On the Republican side, Representative Eric Cantor of Virginia reiterated his desire to see the corporate tax rate slashed to 25 percent from 35 percent.

Senator Charles Grassley, the top Republican on the tax- writing Finance Committee, said pressure for pet proposals from various interest groups is inevitable. “It happens every tax bill,” he said. “We’ve only been in town 24 hours.”

Bush himself yesterday added a note of caution to predictions of speedy legislation. “Legislative bodies don’t move necessarily in an orderly, quick way,” he said. “Everybody wants to get something done quickly. We want to make sure it gets done right.”

U.S. Stocks Fall for Sixth Day on Apple, Motorola Forecasts

Jan. 23 — U.S. stocks dropped for a sixth day, the longest losing streak since April 2002, after forecasts of slowing sales by Apple Inc. and Motorola Inc. added to concern the economy is falling into a recession.

Apple tumbled the most in more than five years on the Nasdaq Stock Market after saying sales growth will fall to 29 percent this quarter from 35 percent in the previous three months. Motorola, the largest U.S. maker of mobile phones, posted its biggest drop since October 2002 on a forecast for an unexpected loss. Freeport-McMoRan Copper & Gold Inc., the world’s second-biggest copper miner, declined to the lowest since August after earnings trailed analysts’ estimates.

“I would say that we’re already in a recession,” Jack Rivkin, who oversees $126 billion in New York as chief investment officer at Neuberger Berman, said in an interview with Bloomberg Television. “Odds are earnings are going to be down for 2008.”

The Standard & Poor’s 500 Index, which is off to its worst- ever start to a year, slid 11.31, or 0.9 percent, to 1,299.19 at 11:25 a.m. in New York. The Dow Jones Industrial Average declined 58.77, or 0.5 percent, to 11,912.42.

The Nasdaq Composite Index tumbled 40.15, or 1.8 percent, to 2,252.12 and is in a so-called bear market, marked by a more- than 20 percent drop from its almost seven-year high in October.

A slowing U.S. economy is rattling consumers around the world. Growing concern that losses from subprime mortgages will cause the global economy to slow has battered European shares and sent more than 45 of the world’s 68 markets with at least $10 billion in value into bear markets.

Rate Cut

The Federal Reserve cut its benchmark interest rate by 0.75 percentage point yesterday, the most in 23 years. The S&P 500 fell to a 16-month low after the Fed’s emergency reduction failed to convince investors the U.S. will avoid recession.

Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, reduced his 2008 estimate for the S&P 500 by 7.5 percent because interest-rate cuts may come too late to avert a decline in earnings. The New York-based strategist lowered his year-end forecast for the S&P 500 to 1,550 from 1,675, according to a note sent to clients.

Technology companies and energy producers, which helped lead the market’s advance last year, have been among the biggest decliners in 2008. The S&P 500 has lost 13 percent this year and is headed for its worst monthly decline since August 1998, when the benchmark tumbled 15 percent as Russia defaulted on domestic debt.

Apple, Motorola Slump

Apple dropped $20.54, or 13 percent, to $135.10. Chief Executive Officer Steve Jobs spooked investors by failing to meet the most optimistic projections for first-quarter profit and forecasting slower sales growth. IPod sales were little changed in the U.S., signaling that demand for consumer electronics is waning.

UBS AG and Bank of America Corp. lowered their price estimates on the stock.

Motorola lost $2.10, or 17 percent, to $10.22. The company forecast a loss for the first quarter after posting an 84 percent drop in fourth-quarter profit as customers fled to phones made by competitors. Fourth-quarter net income fell to $100 million, or 4 cents a share, while sales declined 18 percent to $9.65 billion.

Freeport-McMoRan declined $7.17, or 8.8 percent, to $74.35 after fourth-quarter profit fell 2.8 percent on increased costs associated with its acquisition of Phelps Dodge Corp.

Exxon, Chevron

Exxon Mobil Corp., the biggest U.S. oil company, slumped $2.86 to $79.59. Chevron, the second-largest, lost $2.98 to $78.27. Crude for March delivery fell $1 to $88.21 a barrel in New York on concern the world’s biggest consumer of energy will slip into recession.

ConocoPhillips, the third-largest U.S. oil company, lost $1.59, or 2.2 percent, to $69.59 even after reporting fourth- quarter profit rose 37 percent to $4.37 billion. Crude rose almost 18 percent during the quarter and touched a record $99.62 on Jan. 2.

Financial shares in the S&P 500 climbed for a second day, adding 2.2 percent as a group on expectations that lower interest rates will spur lending and boost profits. The group lost 21 percent in 2007.

JPMorgan Chase & Co., the third-biggest U.S. bank, increased $2.22 to $43.08. Bank of America Corp., the second- largest, added $1.49 to $38.88.

The Fed’s rate cut “is delivering free money to banks,” said Wayne Wilbanks, who manages about $1.2 billion at Wilbanks Smith & Thomas Asset Management in Norfolk, Virginia. “If you look at any of these financials, they are blown-out-of-the-water oversold.”


MGIC Investment Corp., the largest U.S. mortgage insurer, was the biggest decliner in the S&P 500, falling $4.88, or 30 percent, to a 15-year low of $11.17. MGIC fell the most since it sold shares to the public in 1991 after reporting a sevenfold surge in fourth-quarter claims tied to overdue mortgages.

SLM Corp., the biggest provider of student loans, fell $2.10, or 11 percent, to $16.92 after reporting a net loss of $1.6 billion, or $3.98 a share. The company also known as Sallie Mae made a losing bet on its own stock while facing higher borrowing costs and cuts in federal subsidies for loans.

Sallie Mae’s results include a $1.5 billion loss on contracts in which the company bet that its stock would rise. Instead, the stock fell after the collapse of last year’s $25.3 takeover offer by J.C. Flowers & Co. and other investors.

Europe’s benchmark index, the Dow Jones Stoxx 600, dropped 2.9 percent after the European Central Bank damped speculation it would follow the Federal Reserve in lowering interest rates.

U.S. companies that rely on Europe for sales declined. General Electric Co. lost 31 cents to $33.74. The company booked 26 percent of its 2006 revenue from European sales, according to Bloomberg data.

Asian shares rebounded from the worst two-day decline in 18 years, with the MSCI Asia-Pacific Index adding 4 percent. Hong Kong’s Hang Seng Index rallied 11 percent, its biggest gain in 10 years.

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