Financial markets of South and South-East Asia:

Usen Suleimenov, MIR, Columbia University, New York, USA

Lessons from Asia
The Bush Administration is proposing to freeze the resets on sub prime loans in order for borrowers to be able to continue to pay their mortgages.  This of course is politically expedient.  But is it good economics, some ask.  Many have condemned the proposal as going against the original spirit of the contract and therefore will undermine the competitiveness of the US dollar as a store of value, and the attractiveness of the US economy as the storehouse of wealth.  Recently, the SEC had given notice that it would strictly enforce “short selling” regulations to ensure that “short sellers” have actually borrowed stock that they are selling.
During the Asian Financial Crisis, the HK government was castigated by many «free market» thinkers for intervening in the stock market to stop speculators using it as a proxy for shorting the HK dollar.  Similarly, the Malaysian government was pillored for imposing exchange controls.  In both cases, the governments saw the need to protect the local economy from excessive outside intervention and took the appropriate steps.  The current strength of the economies belies the dire predictions of the «learned» community.
Text books on economics are written after the fact.  Different people will extract and interpret facts in different ways.  In time, some of these lessons will be «Economics 101».  People tend to forget the market is made up of individuals who are prone to the emotions of fear and greed.
That’s «Market economics 101».  Sometimes, it is necessary to take some action that the «pure» economists abhor.  The alternative is that we will be faced with a bigger problem of a collapse as borrowers renege, banks start writing off bad debts, and the credit crunch becomes a black hole.

How Will Sub Prime Impact Asia
The sub prime crisis will take some time to work its’ way through.  There is a real problem in that the underlying assets may not be as good as it should be because mortgage originators have been cutting corners and lending to unqualified borrowers.  However, the extent of the problems in the financial market is magnified by the fact that there is no market for the CDO’s securitized by mortgages regardless of the quality of the underlying assets.
So far, we have seen financial institutions writing off tens of billions of US$.  There have been delinquencies in mortgage payments but not to the extent suggested by the financial markets which have over reacted as usual.  Just because Merrill Lynch (US$15 billion) and Citigroup (US$18 billion) have had to write off tens of billions of US$, the market is expecting every bank to have to do the same.
JP Morgan has just announced write-offs of less than US$1.3 billion much less than Merrill or Citigroup.
The US government has been mulling measures to stave off a recession and a collapse of the housing market.

Tightening in China
The Chinese has a different problem.  Instead of trying to stimulate the economy, the Chinese Government is trying to hold back inflation.  The Chinese government announced that the banks reserve ratio will be further tighten to 15% in an attempt to rein in inflation.  In a mature economy where the deposit base is stable, increasing the reserve ratio will mean less money can be lent out.  But in China where the deposit base is growing at double digits, increasing the reserve ratio will very little impact on banks’ ability to lend.
Some people are concerned that exports to the US will fall because the US economy may go into a recession.  In looking at exports, we must remember that only a small component of that is value added in China.  The rest are raw material and energy costs.  Therefore, we cannot compare the entire value of exports to GDP (which measures value added) as some have done.
Using only value added in China, exports are not a large component of GDP.  In fact with the Chinese economy expanding at double digits, any shortfall in exports may be made up for by increased domestic consumption.
Analysts have bemoaned the slowdown in profits growth at Chinese companies which fell from 42% for the 1st 6 months of 2007 to 20% in 2008.  Anywhere else, a 20% profit growth would have been trumpeted as outstanding.  When you have been used to exceptional high growth, it is a big come down to just high growth.