Alan Greenspan Wouldn't Recognize the Asia of Today Versus 2004

"The Fed’s move has been extensively telegraphed"

The last time the Federal Reserve started a tightening cycle, Asia's economy was in bullish shape.

It was 2004 when then Fed Chair Alan Greenspan pulled the trigger on a new round of interest-rate increases. The Fed raised by a quarter percentage point to 1.25 percent in the middle of that year, beginning a cycle of tightening through to mid 2006, when the benchmark rate reached 5.25 percent.

Back then, Japan was the world's second-biggest economy. China was growing by double digits and the tiger nations of Southeast Asia were firing again, with the Asia financial crisis seeming like a distant memory.

japna china

This time, as current Fed Chair Janet Yellen inches closer to lifting interest rates for the first time since 2006, the outlook in Asia is decidedly more subdued.

China is on track for its slowest growth in 25 years, Japan came close to its second recession in three years, capital has poured out of the region, and once darling economies like Thailand and Malaysia are limping.

Nervousness around China's $5 trillion stock market rout over the summer was one of the reasons cited by Yellen for holding off lifting rates in September. 

slowing growth

Analysts are divided on how vulnerable Asia will be to any Fed tightening this time around.

One obvious risk is the large build up in U.S. dollar debt. Rising U.S. interest rates will lure capital from the region and drive down local currencies, making it harder to service foreign debt. It's especially a worry for countries like China, Indonesia and Malaysia. Economists Barry Eichengreen and Ricardo Hausmann coined the term "original sin" to describe the difficulties encountered by developing nations borrowing overseas. 

China debt

Countering these concerns has been a build up in reserve buffers, the increased use of floating exchange rates and relatively robust fiscal positions. Those defenses could be enough to shield Asia from the Fed, some analysts say. 

Bloomberg Intelligence economists Fielding Chen and Tom Orlik say China is among the most resilient.

"The Fed’s move has been extensively telegraphed, so a sharp swing to capital outflows from Asia appears unlikely," they wrote. "Even it does occur, the impact on China would be through weaker demand from more exposed trade partners like Korea, not a direct blow."