David Pilling 2008-10-20
Far, far away from the woeful mess engulfing the wicked countries of the west lies an upright land with fecund trade surpluses, near-bottomless pools of central bank reserves, well-capitalised banks and a healthy aversion to “money game” speculation.
This land of Asia, dear children, shunned the easy profits promised by the peddlers of toxic derivative products and fancy collateralised debt obligations. Its banks eked out a respectable living through the sensible business of lending money, its manufacturers through the old-fashioned practice of making things. This is why Asia has avoided the financial near-collapse that rained down on the casinos of Wall Street and London. This is why, too, Asia will now become the sole motor of global growth.
That, unfortunately, is where this particular fairy tale ends. Any lingering fantasy that Asia could insulate itself from the storm raging through the rest of the world was swept aside last week.
Take Japan, a country whose once-precarious financial institutions now have low funding needs, a solid capital base and little exposure to subprime loans. Yet none of this prevented the stock market from shedding one-quarter of its value in five hair-raising sessions, nor an insurance company from becoming the first financial domino to topple. In shiny India, where the rupee and the stock market have been chasing each other downhill, the government launched a criminal investigation after rumours sparked a run on ICICI, the largest private bank.
In South Korea, President Lee Myung-bak launched a campaign to salvage an economy showing many of the same symptoms – a collapsing currency, high external debt and a current account deficit – that beset it in 1997 when it was rescued by the International Monetary Fund. Even China, Asia's powerhouse, showed some signs of strain. Car sales slowed, steelmakers prepared to slash output and commodity prices headed for their biggest quarterly drop in 50 years on expectations that China's breakneck growth of 12 per cent could slip to as low as 8 per cent.
Central banks across the region responded with what amounted to co-ordinated monetary easing. South Korea, Hong Kong and Taiwan cut rates on the same day, following previous reductions from Australia and China. Several governments announced emergency stimulus packages intended to avert recession.
Problems have spread via two channels. One is fear. When panic set in last week, investors sold indiscriminately, pulling out of risk assets and moving into safe havens, mainly US Treasuries. Now that partial nationalisation of the banking system has restored some calm, Asia may see a modicum of confidence restored. The other transmission mechanism, trade, will not be so easy to fix. US and European demand, already tailing off, is expected to shrink further as consumers cut up their credit cards and recession grips.
Yet, the Asian fairy tale is not without a glimmer of truth. If the tide of the financial crisis has indeed turned, when the waters recede they will reveal a global landscape in which Asia, though damaged, will look more solid than the west. The Asian Development Bank – even as markets were collapsing – was predicting that developing Asia would grow at 7.5 per cent this year, what it called a welcome slowdown from the overheated 9 per cent of last year. That may turn out to be a tad optimistic. Yet growth will outpace that of the US and Europe by some distance, accelerating a recalibration of global wealth that has been proceeding for two decades or more.
There is also an irony to recent events. Asian governments, which by and large have been suspicious of some of the perceived excesses of deregulated capitalism, now preside over economies that – by some measures at least – are more free market than those in the west. It was noticeable, for example, that nominally communist China lifted a ban on short-selling just as light-touch regulators in London and New York were imposing temporary curbs.
Likewise, Japanese banks, one of which has picked up most of Lehman Brothers and another a sizeable chunk of Morgan Stanley, are also in an odd position. Having recently paid back state capital injections, they are now almost entirely in private hands. Japan, sometimes called the only socialist country that works, may actually turn out to be the last bastion of capitalism.
The writer is the FT's Asia edition editor
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