Asian markets fall more on concerns over U.S. economy

Posted in Asia | 28-Feb-07 | Author: Keith Bradsher| Source: International Herald Tribune

Investors watch stock prices in Kuala Lumpur on Wednesday.

HONG KONG: Stock markets fell sharply across most of Asia on Wednesday, as investors fretted about weaknesses in the U.S. economy and worried that the flow of cheap Japanese yen into regional stock markets might soon dry up.

Stock markets in China, where a historic 9 percent plunge Tuesday opened a global sell-off, bounced back to close nearly 4 percent higher by early Wednesday afternoon, bringing the Shanghai composite index to approximately the same level of ten days ago.

But markets elsewhere in Asia, which had fallen only modestly Tuesday in response to the Shanghai market's plunge, plummeted Wednesday in tandem with steep falls on the New York and European stock markets.

Shares in Asian exporters to the United States suffered particularly heavy losses in Asia trading after a U.S. report on Tuesday that American orders for durable goods were unexpectedly weak in January.

The U.S. Commerce Department said Tuesday that orders for durable goods — which include equipment like household appliances, jet engines and computer parts — fell 7.8 percent in January. The news sent share prices tumbling in the United States and Europe, with the Dow Jones Industrial average closing down 3.3 percent.

"There is a worry that U.S. consumption could slow substantially," said Tao Dong, the chief Asia economist at Credit Suisse. "That is a much bigger factor than China's stock market."

The Topix Index in Tokyo dropped 3.5 percent by early Wednesday afternoon, and the Hang Seng Index in Hong Kong and the Kospi Index in South Korea each fell 2.9 percent. The Singaporean bourse was down 4.2 percent, the Malaysian market was down 6 percent and the Philippines market plunged nearly 8 percent.

Stock markets in Australia and India were more resilient, each falling about 2.7 percent.

Rajat Nag, the managing director general of the Asian Development Bank, said in an interview in Hong Kong late Wednesday morning that the economic fundamentals of most Asian economies were strong.

But the region remains heavily dependent on exports, especially to the United States. China is among the most dependent of all, with international trade in goods equal to 65 percent of its economic output last year, he said.

"We are still fairly bullish on the Chinese economy's growth potential," Nag said, adding that China's dependence on exports "is a vulnerability."

The broad scope of stock market drops across Asia underlined the region's deepening connection to global financial markets and growing reliance on exports to the industrialized world.

"Every morning, most traders will get a fix on how the Asian markets are trading and how did the Nasdaq close — I think people have gotten more globalized," said Sandeep Nanda, head of research at Sharekhan, one of the largest retail brokerages in India.

Tim Condon, the head of financial markets research at ING Financial Markets in Singapore, said that the most significant thing about the ongoing drop in stock markets was that it was the first such global shock to financial markets that has emerged from China.

"It's a recognition of the fact that China is a big part of the rally in risky assets," he said.

Many investors have been borrowing at extremely low interest rates in Japan to make investments around the globe. Foreign money has been rushing into investments as obscure as Iceland bonds. John Edwards, the chief economist at HSBC Australia and a former adviser to Paul Keating, the former prime minister , said that if investors continued to sell their holdings to pay off their loans in Japan, then prices could continue to fall.

Another source of funding for the cash sloshing through global markets has come from what many economists say is a surplus of savings by Chinese, as well as China's more than $1 trillion in foreign exchange reserves. Funneled back into global financial markets through Chinese investments in Treasury bonds and other securities, China has become a leading source of global capital.

"When people get anxious that China may turn that tap off we get market reactions like yesterday," Condon said.

In Thailand, a major concern is the prospect of further weakness in the dollar. If an economic slowdown in the United States causes the Federal Reserve to reduce interest rates, it would become less attractive for foreign investors to buy dollars so as to invest in treasuries and other interest-bearing securities in the United States.

Thai exports of cars, rice, sugar, and electronics have already become more expensive on the world market after a 17 percent rise by the baht against the dollar in 2006.

Early Wednesday the baht rose against the dollar by four-tenths of a percent to 35.4 per dollar. That bucked a trend by other currencies in southeast Asia, including the Indonesian rupiah, the Singapore dollar, the Philippine peso and the South Korean won, which all fell against the dollar as investors mostly sought the perceived safety and stability of the dollar.

There is less concern in Thailand, by contrast, for the stock market, which has been dragged down by the country's long-running political crisis and fell about 5 percent in 2006, even as Shanghai's market rose 130 percent last year.

"We shouldn't go down too hard, having never gone up," said Supavud Saicheua, the managing director of Phatra Securities, which conducts research for Merrill Lynch in Thailand.

Thailand's stock market index was down 2 percent in morning trading on Wednesday.

"The problem is that we don't know how big of a worry this is going to be," Supavud said.

Wayne Arnold in Singapore, Martin Fackler in Tokyo, Tom Fuller in Bangkok, Anand Giridharadas in Mumbai and Tim Johnston in Sydney also contributed to this story.