JANET Yellen probably doesn’t think about Bangkok, Jakarta or Manila very often – the Federal Reserve chairwoman has enough to worry about in Washington. But as she continues to ponder hiking interest rates, the frenetic sell-offs in stock markets on the other side of the world should give her pause.
Stock exchanges in emerging markets are on their longest losing streak since 1990; since a late-April high, the MSCI south-east Asia index has lost almost 9 percent. If Yellen is wondering whether the developing world is ready for a tightening of US monetary policy, the answer from Asia has been a resounding no.
Late last year, a tightening of 25 basis-points would probably not have posed any problems. But, in the interim, China’s slowdown has darkened the global economic outlook (even as its own equity bourses continue to skyrocket).
Sell-offs in Indonesia, Malaysia, the Philippines, Thailand and elsewhere speak to the growing anxiety about the two biggest actors in the global economy.
Trade shock
The most immediate worry is the trade shock emanating from China. Massive share rallies in Shanghai and Shenzhen are papering over a growing number of economic cracks in China, including deflation and weak household spending. Despite government pledges to achieve 7 percent growth, sliding commodity prices suggest Chinese growth is decelerating.
And MSCI’s decision not to include China in its indices is a reminder that Asia has been hitching its future to an economy that isn’t yet ready for prime time.
Asia also worries that China’s problems will be exacerbated by the Fed. Monetary purists will be tempted to dismiss the argument out of hand – the Fed should focus on keeping the US economy stable and healthy, because that’s ultimately in the best interests of everyone from Seoul to Sao Paulo. What this line of thinking misses, though, are the feedback effects created by Fed policy. As the dollar rises, it draws money away from the developing world – often violently so.
Banking systems
Consider how a strong dollar helped precipitate Asia’s 1997–1998 crisis and Latin America’s a decade earlier. The world, it must be acknowledged, has become addicted to zero interest rates.
In the 10 years between its late 1990s crisis and Wall Street’s in 2008, countries in Asia stabilised their banking systems, diversified their economies away from exports, encouraged entrepreneurship and attacked corruption.
Central banks in the region amassed trillions of dollars of currency reserves and markets became more transparent. But the urgency disappeared as ultralow rates in Washington, Tokyo, Frankfurt and London sent waves of liquidity Asia’s way, boosting equities and ginning up growth.
Quantitative easing arguably benefited Asia more than the West. Officials in the region have spent the past several years signing foreign direct investment deals – witness the many splashy new skyscrapers, shopping malls, and state-of-the-art factories funded by foreign money – and celebrating countless initial public offerings on their stock exchanges.
Complacency set in as unproductive investments accumulated, cronyism thrived and everything from financial systems to education programmes went neglected.
Asian markets are understandably anxious about the prospect of the monetary fuel that has been driving this growth these past six or seven years running dry. Reclaiming monetary normality can be a near-impossible task once investors, bankers, businesspeople and politicians alike get used to the wonders of free money. That’s especially true of nations with sizeable debt loads. (Yes, that means America and Europe.)
William Pesek is a Bloomberg columnist