Asia poised to escape major fallout from subprime crisis

Asia poised to escape major fallout from subprime crisis

Seoul: College senior Kim Mi-jin is unfazed by global financial turmoil, sitting in a Starbucks near the old royal palace studying for an exam to be a securities consultant.

“I feel like it’s a short-term factor," she says of U.S. subprime mortgage woes that have rattled markets from New York to New Delhi. “There are many efforts being made in America to fix this problem and so I’m sure it will be resolved."

If a rebound in Asian financial markets this week is anything to go by, such confidence looks increasingly warranted.

Massive efforts the past two weeks by central banks, including the U.S. Federal Reserve and the Bank of Japan, to pump liquidity into the world financial system to halt the crisis seem to be soothing investors’ frayed nerves.

Wall Street has rallied much of this week, providing a boost to most Asian stock markets. Japan’s Nikkei 225 index rose three of five sessions on Asia’s largest bourse. South Korean stocks gained four days in a row before slipping Friday.

Still economists warn that the situation could quickly blow up again if concerns over the subprime issue -- the rising default rates among U.S. mortgage holders with poor credit histories that spooked credit, stock and currency markets --rear up once more.

“I think the word is fragile," David Cohen, head of Asian forecasting for Action Economics in Singapore, said in describing the market situation. “One more headline for some hedge fund and they could be melting down again."

Beyond the markets, economists say Asia’s fast growing economies are better placed than in past crises to escape damage, given stronger intra-region demand, the emergence of China and India as growth engines and increased diversity in export markets.

Nevertheless, U.S consumers, who account for 20% of the global economy, still loom large.

“It really depends on how badly U.S. growth gets hit," Bill Belchere, chief Asian economist at Macquarie Securities Ltd. in Hong Kong, said of the outlook for the region. That said, Belchere added he would be “stunned" if the fallout led to a recession in Asia.

In a report Friday, ratings agency Standard & Poor’s said Asia would be able to weather the global market turmoil without “major reversals."

“Asian economies have improved their banking systems, reined in fiscal deficits, brought down external debts, built up foreign exchange reserves and improved their current account balances," credit analyst Ping Chew said in a statement.

Macquarie’s Belchere also said that recent quarterly economic growth figures for Singapore, Hong Kong, South Korea and China were all stronger than expected, providing some buffer.

China, the world’s fastest growing economy, expanded a stunning 11.9% in the three months ended June 30, its fastest rate in a dozen years.

Governments, while saying they are closely monitoring signs of any subprime impact on their economies, have expressed optimism the region is basically solid.

“This is not a financial crisis in Asia," Singapore Prime Minister Lee Hsien Loong said in a speech Sunday, his country’s National Day. “This is a crisis in the advanced countries which has affected us. I believe the mid- to long-term prospects are very good."

Australian Treasurer Peter Costello said Tuesday that his country’s economy would ride out any U.S. downturn. South Korea’s Vice Finance Minister Lim Young-rok sees opportunities in other markets.

“Even if the U.S. economy slows, South Korea’s exports will remain robust if China, newly developing countries, Europe and Japan continue to show strong growth," Lim told reporters Thursday.

A big question is how badly Japan would be hit if conditions deteriorate.

Though analysts say the country’s vulnerability to the subprime crisis itself is limited, Asia’s biggest economy has not escaped the global fallout.

“Japan’s direct exposure should be pretty small," said Hiroshi Shiraishi, economist at Lehman Brothers in Tokyo. “We’re looking at more indirect effects."

Most damaging has been a jump in the yen against the U.S. dollar as investors hit by subprime woes -- and spooked by a possible U.S. economic downturn -- scramble to reduce their exposure to the risky yen carry trade.

That involves selling off Japan’s low-yielding currency in favor of higher-yielding investments in other markets. To unwind their positions, investors buy back the yen, driving up its value.

Japan’s currency soared last week, at one point hitting 111.80 yen to the dollar, its highest level since June 2006. It has since fallen back, though remains well off lows for the year.

Share prices of exporters including Toyota Motor Corp. and Sony Corp. have slumped during the subprime storm. A stronger yen can make their products more expensive in overseas markets, also potentially reducing the value of profits earned abroad when brought back home.

Still, Bank of Japan Gov. Toshihiko Fukui remained optimistic about Japan’s economy Thursday, telling reporters “long-lasting economic growth led by a favorable cycle of production, income and consumption will likely continue" despite market instability.

Some Asian companies see a chance to increase sales in the U.S. even if consumers end up tightening pursestrings.

Kim Deuk-ju, finance chief at South Korea’s Kia Motors Corp., which exports about 25 percent of its vehicles to the U.S., says Japanese automakers skillfully gained market share during previous economic crises with their fuel-efficient cars, such as in the oil shocks of the 1970s.

He said that a possible slowdown in the U.S. provides “some risk but at the same time some opportunity" for Kia.

“In the United States, without a car the customer can’t do anything," Kim said.

Associated Press writers Sangwon Yoon in Seoul, Hiroko Tabuchi in Tokyo, Gillian Wong in Singapore and Elaine Kurtenbach in Shanghai contributed to this report.