Learn Mandarin online - Asian investors, fasten your safety belts

?  ?

WORLD / Asia-Pacific

Asian investors, fasten your safety belts

By Barry Eichengreen (The Korea Herald/ANN)
Updated: 2007-08-29 07:12

Investors have now begun to appreciate the importance of the US financial
crisis and its effect on the Asian economy. For those hoping that the
worst is over, I have news from America: You ain't seen nothin' yet.

The outlook for the US economy is bleak. It is increasingly difficult to
tell a story that does not involve a recession, or at least a very
significant economic slowdown, in the next 12 months.

The US housing bubble has burst. This is not exactly news, of course.
Existing home sales had dropped by 20 percent from their peak even before
the most recent bout of financial turmoil. New home sales have declined
by 40 percent. The inventory of unsold homes has already exploded.

Last week's disappointing consumer confidence numbers from the University
of Michigan clearly signaled this fact. Those numbers surely loomed large
in the Fed's extraordinary intra-meeting discount-rate cut last Friday.

The threat to US growth is not simply that non-residential investment
will tank now that corporations in other sectors are finding it more
difficult and costly to borrow. It is that the growth of private
consumption will now slow sharply. And private consumption accounts for
more than 70 percent of US demand.

If the "consumer of last resort", the American household, now goes on
strike, this will have serious implications for other countries and for
Asia in particular.

There has been much talk in the last year of "decoupling"- of whether
Asia can keep growing if US growth stops. The idea is that Asia now has
an independent growth pole in China. And, with the Japanese economy doing
better than it has in a decade, Asia can keep dancing even when the
American music stops.

Nothing could be more wrong. Half of all Chinese investment is in the
export sector. And those exports are heavily destined for the United
States. Thus, Chinese economic growth will inevitably be affected by the
US economic slowdown.

This also means a slowdown in Japanese growth and even the return of
deflation.

The implication is that all of Asia should prepare for a significant
economic slowdown. The impact of US troubles will be more immediate still.

In offering this gloomy forecast, I like to think that I am not simply
joining the latest pessimistic bandwagon.

Full disclosure requires acknowledging that we anticipated that those
problems would be accompanied or even precipitated by a sharp drop in the
dollar. So far, however, problems have centered in the markets for
collateralized debt securities and commercial paper, not the market for
foreign exchange.

Investors have not fled the US for other countries, or caused the dollar
to tank. But it is still too early to dismiss this risk. Foreign
investors, including central banks, have been diversifying out of US
treasury bonds into mortgage-backed securities and the US stock market.

These investments now look less attractive in light of recent
developments. And if these alternative investments look dicey,
diversifying out of US treasuries will require diversifying out of
dollars.

The result will be a sharply lower dollar, which will be more bad news
for Asian exporters.

The Korea Herald/ANN

Top World News ?

* Taliban say to start releasing Koreans
* Ex-Islamist Gul elected Turkey's president
* Iran ready to fill any vacuum in Iraq
* US Attorney General Gonzales resigns
* Prosecutor orders probe into Greek fires

Today's Top News ?

* US opposition to Taiwan referendum appreciated
* Party Congress set for mid-October
* Grim task ahead to cut pollution - official
* 3 Koreans freed in Afghanistan
* US opposes Taiwan's UN membership referendum

Most Commented/Read Stories in 48 Hours

Learn Chinese, Chinese Online Class, Learning Materials, Mandarin audio lessons, Chinese writing lessons, Chinese vocabulary lists, About chinese characters, News in Chinese, Go to China, Travel to China, Study in China, Teach in China, Dictionaries, Learn Chinese Painting, Your name in Chinese, Chinese calligraphy, Chinese songs, Chinese proverbs, Chinese poetry, Chinese tattoo, Beijing 2008 Olympics, Mandarin Phrasebook, Chinese editor, Pinyin editor, China Travel, Travel to Beijing, Travel to Tibet