ASIAN MARKETS ON REBOUND SHOULD GUARD AGAINST HOT MONEY
Asian stock markets are glimmering with new life as local economies start to rebound and the first optimistic signs of a full-fledged recovery spread through the region.
A close look at individual markets, however, paints a very diverse picture. Some economies have indeed returned to pre-crisis levels, while recovery in others continues to be fragile.
One source of concern is the rise in stock prices across Asia due to the rapid inflow of Western capital. The crisis has forced Asian nations to learn the hard way that an inward flood of capital could at any moment become a massive outward surge. Rather than become dependent again on foreign capital, they would do better to quicken the pace of currency and structural reforms to ensure there will be no repetition of the debacle.
Stocks are starting to shoot up rapidly in countries where a debt workout has made progress. South Korea, in particular, is regaining investor confidence, with President Kim Dae-jung pushing through radical financial and fiscal reforms with near-messianic zeal.
South Korean banks have removed a sizable chunk of bad loans from their books, and industrial output is picking up. The country's economy is expected to return to a growth track this year.
The bulls have also reappeared in Malaysia, driving stock prices to one new yearly high after another. Prime Minister Mahathir Mohamad's stringent capital controls, which attracted harsh criticism from the West, have yielded only modest results in terms of reducing bad debts.
Meanwhile, in Thailand, China and Indonesia, bourses are showing relatively less vitality due to delays in clearing up massive bad-debt overhangs. Thailand has failed to make as much progress as expected in cleaning up its bad-debt mess. In fact, bad loans on the balance sheets of Thai banks have even grown.
China's state-run commercial banks continue to drown in unrecoverable debt, with no major improvement in their balance sheets. A mishandling of the problem could trigger a massive drain of foreign capital out of the country.
Indonesia's situation is even graver. Last year, the government created a special debt-restructuring task force, but it has been largely ineffective so far. For creditors, terms are too demanding and the balance sheets of debtors not transparent enough for restructuring to begin in earnest. A murky political outlook in the run-up to the June general elections is only making things worse. The reappearance of hot money flowing back into the Asian region is alarming. It is also pouring into currency markets, raising the specter of another market meltdown caused by hedge funds.
An international scheme to monitor the flow of speculative capital from hedge funds needs to be created quickly. The recent general-assembly meeting of the Asian Development Bank discussed the issue, but no agreement emerged, due mainly to U.S. opposition to any form of capital controls.
If international monitoring of short-term capital is not introduced, Asian nations should take individual steps to slow the flow of such money into their markets. Setting up doorways that are too narrow, however, would also result in restricted inflows of much-needed long-term foreign capital. Most Asian nations are still not sure what kind of system is best suited for them.
Malaysia and China have strict capital controls and both succeeded in limiting the damage from the currency crisis. But capital liberalization, at least to some extent, is essential for further economic development.
By contrast, to obtain loans from the International Monetary Fund, South Korea has further opened its economy and markets to stock and real-estate investment by overseas capital, which has led to a sharp increase in foreign direct investment. But the open-door policy is under fire at home for being too rash.
Meanwhile, Western criticism of Asia's crony capitalism has subsided, even though the need for structural reforms in the region remains as strong as ever. Most countries have already started to repair their systems, but it will be several years before there are significant results.
South Korea is struggling to overhaul its giant industrial conglomerates, called chaebol. Unemployment is bound to increase throughout the region for the time being; Asia won't be able to stage a real comeback until leading regional companies modernize their operations and become globally competitive.
Japan has proposed a "currency-basket" system in which the currencies of emerging market countries are linked to a combination of major currencies such as the dollar, yen and euro. The basket system is designed to prevent another currency crisis in the region; Japan should actively promote the idea to the nations concerned.
During the recent meeting of finance ministers of members of the Asia-Pacific Economic Cooperation (APEC) forum in Malaysia, Japanese Finance Minister Kiichi Miyazawa pledged to extend $17 billion in guarantees for sovereign bonds issued by other Asian countries. This is in addition to the $30 billion in assistance to Asia under the Miyazawa Initiative. The entire region welcomed the initiative, but Japan should extend the assistance only to those countries that demonstrate willingness to undertake aggressive structural reforms.