The economies of the Asia-Pacific region, and their capital markets, stand at a junction of opportunity and risk. The most prominent risk is a slowdown in the US and possibly the Eurozone economies, hitting those countries that export heavily. Moreover, although the scale of the US slowdown has yet to become apparent, it's onset is enough to make confidence wobble. The US tech and telecoms correction, and the travails of the NASDAQ, are also a source of concern - in recent years the Asia-Pacific markets have become more strongly correlated to the US in particular, with relatively minor movements in the US markets causing rapid reactions in Asian markets.
The second substantial risk, again perhaps more a threat to confidence than anything else, is the heightened tension between China and the US. The standoff following downing of the US spyplane, the suspension of US-China military contacts, and President Bush's reassessment of China as a 'strategic competitor' rather than Clinton's 'strategic partner' have all caused market jitters across the region. These have, however, been short-lived in most cases.
But to borrow the Chinese habit and take the long view, there are a number of positive ongoing developments in the political and regulatory spheres that should leave the region's political economies in a better shape for the future.
In China, some important steps towards liberalization of the economy and integration into world trade have recently been taken, or are about to be taken. Perhaps the most important of these, on a macro scale, is accession to the WTO. No-one is quite sure exactly when this will happen, but most observers expect to see negotiations concluded by the end of 2001. Aside from the possibility that US enthusiasm for Chinese membership may have cooled, the main sticking point is the exact package of liberalization measures China will be expected to undertake, especially in the agriculture and insurance sectors. While economic liberalization is regarded in the main as a good thing by investors, some analysts are hoping that the WTO will go easy on China, realising that in a country of 1.2bn people, measures that create economic hardship carry significant risks. Whatever the package agreed on, accession represents a milestone in opening up the economy to global influences (and investors).
At the level of China's capital markets themselves, 2001 is turning out to be a year of reform. China is a potential economic giant, yet its bourses have been operating for merely 11 years, and under considerable restrictions. Now these restrictions are being lifted, and the efficiency and operations of the markets are also being improved.
First, in February, B shares in 114 companies, which had hitherto been open to foreigners only, were made available to Chinese. Since then both the Shanghai and the Shenzen B exchanges have seen a bull run by Chinese investors, reaching record highs. This is in part a textbook example of how stockmarkets ought to work: savings (over USD80bn held by private citizens in interest accounts) are now flooding into the market, creating liquidity and capital for productive sectors and stimulating the economy, rather than flooding out of China for want of opportunity.
On June 1st the B shares will be opened up a step further, when Chinese with local currency accounts are granted access. The B shares euphoria is also bolstering the main A shares markets, still closed to foreigners, together worth over USD600bn. Several forthcoming IPOs, including China Unicom, should prolong the bull run. In the longer term, all shares should become available to Chinese and non-Chinese alike, but probably not before 2007 at the earliest.
More good news comes in the shape of hints from officials that the Shanghai and the Shenzen markets are to merge, probably with seamless electronic trading, but retaining two locations. And on May 1st it was announced that the three futures exchanges - Shanghai, Dailan and Zhengzhou - would be electronically linked. Such moves are helping to convince those in the market that post-WTO China is to establish world-class capital markets.
The regional financial hub of Singapore was one of the economies that recovered most strongly from the Asian crisis, and is continuing to become less paternalistic, more entrepreneurial and more global. The acquisition in March 2001 by the 67% state-owned telecoms giant Singtel of the Australian telecoms company Cable & Wireless Optus, for USD9bn, marked a new level of foreign acquisition by a Singapore company. This should contribute to consolidating Singapore's position as a regional financial centre, while government budget surpluses and bulging bank balance sheets make the city state perhaps the best-insulated country in the region against an US downturn.
The other main financial centre of Hong Kong returned a shining 10% GDP growth in 2000, although this was led by exports to the US and domestic economic activity was lacklustre, making the Special Administrative Region vulnerable to a downturn this year. Now low interest rates are helping to revive the property market - always the engine of Hong Kong's economy - and to revive confidence.
Japan has been having perhaps the hardest time of all, but the exit of the discredited prime minister Yoshiro Mori opens the way for an escape from deflation by what is still the world's second-largest economy by GDP. The new prime minister Junichiro Koizumi and his cabinet have been welcomed by investors who hope that they will drive through the uncomfortable reforms that will return Japan to growth. He is expected to propose radical solutions to the banks' bad debt burden, and to accelerate structural reforms. Central bank govenor Masaru Hayami has long insisted that Japan's woes are structural and not cyclical, suggesting that finally addressing structural problems will allow a rebound.
In 2001 the Nikkei has touched 15-year lows, with tech stocks (40% of the index) especially hard hit by a fall in export demand, and dumping by investors. But as in the US there are signs that astute fund managers are now reassessing the low valuation of many stocks, and buying while they are cheap. Combined with improving confidence in the new government, and wider reforms, this may herald a durable recovery in the Nikkei - with benefits for the entire region.
South Korea has been suffering some of the same woes as Japan, albeit to a less severe degree, and urgently needs to restructure its debt-ridden chaebols (diversified industrial groups). One if the government's economic kick-start policies is to inject liquidity into the stockmarket, with profits and confidence trickling down to consumers and bolstering growth. The effectiveness of this policy remains to be seen but, after 9.3% growth in 2000, the government is still predicting a lower but respectable 5.3% growth for 2001, which independent analysts regard as reasonably realistic.
In Malaysia Dr Mahathir is persisting with the capital controls imposed in the wake of the Asian crisis, but is softening them in order to attract investment. In May 2001 the 10% exit tax on share proceeds held by foreign portfolio investors was abolished, and there are signs that the ringitt-dollar peg may be moved from MYR3.8:USD1 in response to the overvaluation of the currency, although a free-floating currency is not yet in the agenda. The government now faces a delicate balancing act - how to ease capital controls to bring back investment, without allowing capital flight.
Political developments also seem, according to initial indications, to be economically favourable in the Philippines and Thailand. In the Philippines the new reformist President Gloria Arroyo is consolidating power against the supporters of Joseph Estrada, whose regime did little for transparency and stability in the country. In Thailand Thaksin Shinawata, a leading businessman, has still to prove his credentials, and has displayed some populist leanings, but his election victory was greeted by an upward surge in the stockmarket, and he has, for example, appointed several privatization experts to the board of Thai airways.
After several years of buffeting Australia's markets seem set to recover. As international investors regained confidence having got over the 1997 Asian crisis, many sold out of Australian stocks, which they saw as 'old economy' - stand bys such as natural resources - in favour of tech stocks. Yet now investors are looking for safe havens away from tech stocks, and are returning to Australia. In addition, the slump of the Australian dollar, and its attendant liquidity crunch, appears to be coming to a close. In April 2001 the AUD hit a record low of AUD1:USD0.4778, but by May 6th had recovered to AUD1:USD0.5200.
On a regional scale, one of the traditional strength of Asian economies has been their high savings rates compared to the US and Europe. Yet as populations become more financially literate, and at the same time and uncertain of their family's ability to support them in their old age, they have realized that the low returns of deposit accounts are inadequate. Mutual funds are therefore growing, albeit from a low base, but offer billions of dollars in managed investment in the coming years. So far Hong Kong is the leading centre for mutuals, followed by Singapore. Still, in Hong Kong a mere 8-10% of people invest in mutuals, compared with around 40% in the US, and China has yet to even pass a law governing funds. Clearly, there is great scope for development and penetration of mutual funds across the Asia-Pacific region.
A further development with region-wide implications concerns fund indices. Indices such as Morgan Stanley Capital International (MSCI) allow fund managers to track stocks and calculate the correct weighting for their portfolio. During 2001 and 2002 MSCI and other indices are moving towards a free-float model, in other words excluding from their reckoning stocks which are not available to investors, such as cross holdings, private-control stakes and government holdings. If these stocks are excluded from free-float indices, Asia could suffer a 30-35% drop in its world weighting, but the freer markets will gain in relation to the less free markets. For example MSCI estimates that South Korea has 61% free float, Malaysia and Hong Kong 47%, and Thailand merely 30%. Like WTO, this provides a positive pressure for countries to liberalise their stock holdings from oligarchic and government control.
Much now depends on the wider global economy, but two things appear certain. First is that endemic structural problems in the region's economies are being addressed anew, be they related to liberalization, transparency or corruption. And second, in several countries new administrations are driving these reforms ahead. Combined with Alan Greenspan's sure touch at the tiller of the US economy, these factors should ensure that opportunity, and not risk, prevail in Asia's capital markets.
