When the Dow Jones Industrial Average jumped almost 2 per cent in a rally earlier this month, the gain in terms of market capitalistation was more than onefifth the size of Thailand's gross domestic product. That observation highlights one of the most important questions confronting international investors as Asia wrestles with financial crises and a market meltdown. Should Asia's flu infect the rest of the world?
Yesterday's rebound on Wall Street suggests US investors are relatively sanguine about the risk of infection. And in broad economic terms, there would appear little reason why Asia's pain should threaten the international economy. The combined GDP of the five biggest Asean economies, plus that of Hong Kong amounted to about $830bn last year. That figure is less than one-fifth of Japan's GDP and a little over onetenth of the size of the US economy.
Such perspectives are significant. But economists caution that the region can punch above its weight. Part of the reason is its importance as a source of growth for many multinationals. Another is its role in international trade.
This is not necessarily bad news. "If you take the case of Taiwan, which has a virtual monopoly on mother boards for personal computers, then the impact will be downward pressure on prices," says Richard Houston, regional strategist for Jardine Fleming. "Multiplying that kind of effect across different products will reduce inflationary pressures in developed markets such as the US."
However, problems are posed by the rise of competition resulting from the wave of competitive devaluations. "With slowing growth at home there is going to be a desperate search for exports, and companies from these economies are going to go head-to-head with rivals in Europe and the US," says the chief economist at one European investment bank. Vulnerable industries, he says, range from steel to consumer electronics to automobiles.
Shares in HSBC, the world's biggest banking group, have dived in London, reflecting the group's exposure to Asia. In the first half of the year, 40 per cent of its pretax profits came from Hong Kong, with a further 15 per cent from the rest of Asia-Pacific operations. Japanese car companies have seen sales plunge in Thailand and other Asean economies.
Painful as these difficulties can be at the corporate level, they should not lead to crisis at the macro-economic level. Even in the case of Japan, the biggest lender and the biggest investor, the direct implications need to be put into perspective. In the banking sector, for instance, Japanese banks provide 42 per cent of Hong Kong lending. But these loans account for no more than 2 per cent of any single Japanese bank's loan portfolio.
