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Asian markets bounce back but bubble is waiting to burst again

Friday 3rd March 2000

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By Peter V O'Brien

Asia has returned. Sharemarkets in Japan and Hong Kong had an excellent year in 1999, albeit from a relatively depressed base. There is still some concern about the nature and speed of the recovery, a point highlighted when credit-rating agency Moody's Investor Services put the Japanese government's yen debt securities under review, possibly for a downgrade.

Moody's expressed concern reforms and restructuring may be insufficient to put the economy into high growth and prevent rising public debt. Government stimulation of the economy in the past decade has put outstanding national and domestic debt to more than 120% of GDP, described as one of the worst ratios in the industrialised world.

Moody's was unsure whether the recent programme of reform and restructuring would reach a "critical mass" to push the Japanese economy into a higher potential growth path without which the public sector debt problem would continue to deteriorate.

The agency recognised recent reforms to the financial system had helped a tentative recovery but said they were insufficient.

From a New Zealand perspective, a guide to the Asian situation can be seen in currency values compared with previous years when NBR Personal Investor last examined Asian sharemarkets (Table II). The New Zealand dollar fell against most Asian currencies in the intervening 12 months, although not all of the decline can be attributed to stronger Asian economies.

The New Zealand dollar declined by more than the change in the trade-weighted index (TWI) in relation to four of the regional currencies and less than the TWI movement for two (the US dollar was included to round out the comparison because it is the world's leading benchmark currency).

Although percentage changes from 1998 to 2000 were excluded, a glance at the table shows the extent of the Asian recovery. It seemed inconceivable in 1998 the Indonesian rupiah and the South Korean won would recover to such an extent in two years.

Recent overseas reports indicate that, while there was substantial change to the structure and operations of Asian financial sectors, it was unaccompanied by a cleanup of managerial practice. The same reports said regional sharemarkets jumped an average of 53% last year but management (under control of the pre-crisis people) practices had "put the brake on" restructuring.

Pressure from the International Monetary Fund forced countries to reform the worst aspects of their financial and corporate structures, but it seems new internal corporate practices are required if Asian economies are to return to pre-crisis growth rates.

South Korea has done a lot to change its corporate culture, with a resulting improvement in growth. A recent article in the biweekly magazine Korea Now by Korean Institute for Industrial Economics and Technology president Lee Young-sae said to stay in the global economy race Korea had to reform its industrial policy and promote corporate as well as human capital quality, factors essential to economic growth.

Mr Lee had specific proposals for change. With the end of the era of high growth, Korea should follow the guidelines of the World Trade Organisation and the OECD to eliminate subsidies to target industries, while pursuing economic growth by meeting the constraints imposed by the global economy. The country must promote highly sophisticated, product-oriented technology to meet growing global demand.

Global economic change also required fundamental change in industrial policies from those aimed at eliminating object gaps to policies formed to eliminate idea gaps. Mr Lee said Korea was far behind advanced countries in relation to the level of sophisticated technology.

Korea's leading industries, such as semiconductors and shipbuilding, had mature technologies in manufacturing and production comparable to those of advanced countries but the competitiveness of core technology, such as design, in those industries was only half the level of advanced countries.

The country's industrial policy had shifted from the promotion of targeted industries to that of innovation-related activities (an indirect reference to the "idea gap"), Mr Lee said.

"Granted that Korea is a long way behind in the software sector, the Korean government has announced a plan to intensively develop promote [sic] the domestic software industry. The government has also led a drive to improve the country's technological infrastructure and to strengthen the competitiveness of the information industries and the nation's overall technological capacity."

Forecasts of major Korean economic indices for Korea in 2000 from the Samsung Research Institute put real GDP growth at 10.2% in 1999, after a decline of 5.8% in the previous year, and a gain of 6.5% for 2000. The Samsung researcher noted money had recently been flowing from the Korean bond market to the stockmarket. At the same time, while stock price volatility was increasing, stock prices were greatly influenced by the future cashflow of firms without factoring in related risks.

"This means that the current boom in the stockmarket is a bubble waiting to bust. In this situation, if the upswing of either the overseas economy or domestic economy ceases, the bubble could burst suddenly, resulting in serious problems such as the collapse of the stockmarket and the massive bankruptcies of venture companies."

The Korean assessments have been detailed because the issues referred to are relevant to other Asian economies. It is not surprising to see Asian commentators emphasise innovative technology and other aspects of "idea-driven" activities when assessing prospects for this year and the rest of the decade.

The European economies and sharemarkets have a mixed outlook this year but it should be noted from Table III that London is still at a healthy level compared with earlier years.

CSFB has said this about Europe: "There is an emerging revolution in the European corporate landscape. The introduction of the euro is only one building block in a much broader reconstruction of the region. While organised labour remains strong, restraining progress on reform of labour markets, this has not precluded deregulation of goods and services and the liberalisation of capital markets."

The firm said the old financial model - banks as the main intermediaries of capital and savings - was giving way to a US-style model dominated by borderless securities markets. The ending of the currency risk under European Monetary Union was one of many forces driving that change. The result was "surging corporate bond issues" to accompany an already buoyant initial public offering market.

CSFB said Europe remained behind the US in terms of personal computer ownership and internet usage. The firm expected "catch-up" benefits and said Europe had substantial technological leadership in mobile telephone infrastructure and handsets, an area that would become more important as the internet and mobile telephony converged.

"It is these businesses that will provide the 'fat tail' of outperformers in Europe."

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