The End of Asia’s Boom Is No Cause for Panic

The trading floor of the Hong Kong Stock Exchange on Aug. 13 Photograph by Jerome Favre/Bloomberg

Over the past few weeks investors have been bailing out of the major Asian markets faster than Jimmy Connors’s tenure as a tennis coach. As Thailand released its 2013 second-quarter growth figures, which revealed the country had fallen into a technical recession, investors have been selling off Thai bonds and getting out of the Bangkok stock exchange. In India the rupee has hit new record lows against other currencies as the country has been reporting enormous current-account deficits. In Jakarta, Hanoi, and even in more stable Asian economies such as Singapore and Malaysia, similar outflows of capital are mounting, exacerbated by the U.S. Federal Reserve’s hints that it may slowly end the period of quantitative easing, marking the worldwide end of cheap credit.

For some analysts, and even some Asian leaders and officials, the massive selloffs, and the reasons behind them, are eerily reminiscent of 1996-97, when money flowed out of Asian economies and speculators attacked one Asian currency after the next, triggering a regionwide financial panic. As in the mid-’90s, many Asian nations today are running massive current-account deficits and have ridden long booms of cheap credit, both at home and in global markets, to build endless housing and industrial developments. With domestic credit become tighter, and the Fed’s tapering of quantitative easing, that credit boom will end. Many Asian nations now face historically bad debt-to-GDP ratios: In Japan the debt/GDP ratio has climbed to 170 percent, while many economists believe that if China’s true debt figures were released, it would have a debt/GDP ratio of more than 200 percent.

In Bangkok in the mid-’90s, cheap credit drove a breakneck development boom. After the crisis hit, the city was left with a maze of half-built skyscrapers, resembling a Mad Max set. But don’t expect a sequel. All of the nations in South and East Asia have been through one Asian financial crisis and have learned some important lessons from it.

For one, fewer Asian nations have currency pegs than in the ’90s, meaning their exchange rates can prove far more flexible in the face of a slowdown. And nearly every nation in Asia has built up far larger foreign currency reserves than in the ’90s, giving them greater defenses against speculation and selloffs. China alone has more than $1.2 trillion in U.S. Treasuries, and even many smaller Asian nations now have large foreign currency hoards. While India in the 1990s had only enough reserves to cover two weeks of severe outflows, today it has around seven months’ worth of foreign currency reserves.

In addition, the Chiang Mai currency swap initiative, created by a group of Asian states in the wake of the Asian financial crisis, provides extra protection against a regionwide contagion. The currency swaps have built up a pool of reserves valued at more than $240 billion, which could potentially be used to flood Asian markets with liquidity in a crisis. These swaps also would prevent Asian nations from being dependent on an International Monetary Fund bailout, allowing Asia to dictate whatever response it needs to currency crunches. Compared with the ’90s, most Asian nations also now enjoy close informal cooperation among central bankers and finance ministers in the region so that any currency crunches do not catch other countries unaware, and that the region’s financial leaders are more likely to act in unison.

Other factors also make a deep, regionwide crisis less likely. In the ’90s much of the investment in Southeast Asia was hot money, poured into the region’s stock markets or into bonds with short-term yields. As the region has become more economically and politically stable, most Southeast Asian nations have been able to go to the bond markets and sell longer-yielding debt, which means that even if investors are concerned about these economies’ trajectories, they cannot just dump all of their bond holdings.

Overall, too, nearly every major economy in South and East Asia is in better shape, for the long term, than it was in the mid-’90s. This doesn’t mean that Asian nations have no problems: China and many other Asian states do need to shift more quickly from dependence on state credit and export manufacturing to growth based on expanding their own domestic consumer markets. And Indonesia, India, and other Asian nations still need to force their banks to clear bad loans, and to crack down on informal, unregulated lending, a particularly severe problem in India and China, while also injecting short-term capital into their markets to stave off currency speculation and massive currency drops.

But emerging Asian economies’ fundamentals are stronger than they were in the mid-’90s, and where there are problems, leaders have a better understanding of how to right their imbalances than they did in the ’90s, a time before many Asian countries were used to playing in the big leagues of global markets. While many of the nations in Asia faced political turmoil in the mid-’90s, which added to their economic woes and spooked investors, several important nations—such as South Korea, Indonesia, and even China—have achieved a high degree of political stability.

In Beijing, Chinese President Xi Jinping and Premier Li Keqiang have openly recognized that China’s economy needs a slow cool-down, and they clearly understand that the era of easy credit must end. Despite China’s overbuilt cities, its real economy remains surprisingly strong, with many of its largest companies remaining highly profitable, even in industries unrelated to real estate. Indeed, the country’s manufacturing sector expanded in August, suggesting China’s real economy is actually getting stronger at the end of this year, compared with the first six months of 2013.

In Indonesia, another key economy in the region, cheap credit has fueled some of its 5 percent to 6 percent growth for more than a decade, but that expansion has been powered just as much by the country’s booming consumer market, demographic dividend, and increasingly stable politics. Even the Philippines, long lagging behind other emerging markets despite its large population, base of English speakers, and close traditional ties to the U.S., has shed its image as the region’s graft-ridden sick man and posted some of the fastest growth rates in the world during the past two years.

The end of the era of cheap credit has already put the brakes on many emerging economies. In Asia that slowdown is likely to be temporary because of the painful but necessary steps taken by governments some 15 years ago. Foreign investors are right to be cautious about Asia’s short-term outlook, but there’s no reason to panic.

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