Randomly Noted

The bailout package for Greece has not stemmed the bleeding in global markets, but for Asia the declines in currencies and stocks may soon lure investors back in.

What we are seeing is Asia and the U.S. catching a cold from Europe, as violence grows in Greece over the planned austerity measures and as ratings agencies sound warnings on the fiscal health of others in the region, including Spain and Portugal.

Just as an example, Hong Kong’s share market has fallen three days in a row, losing 3.7% over that period, while the Taiwan dollar Wednesday fell to its lowest level against the greenback since April 9. Thursday, the Nikkei is down more than 3.0% and South Korea’s Kospi has shed 2.3%, with the Korean won around six-week lows against the U.S. dollar.

The declines in Asia, which have included a widening in credit default swaps in an otherwise encouraging environment for the region’s companies and debt, come as investors react to the latest woes in the euro-zone.

The contagion though for now is peripheral; it’s just the end result of a fading global mood for risk. Strip that away, and what do you find?

Asian banks have minimal exposure to European debt–certainly that from Greece, Spain and Portugal. It seems prudence continues to win the day. Asian banks and their economies came through the recent U.S.-induced financial crisis in relatively good shape precisely because they had steered clear of subordinated debt products and repackaged debt generally.

Asian governments have also–some more so than others–worked to overcome the frailties in their banking and financial systems that were exposed so violently when the Asian financial crisis hit more than a decade ago. That’s left systems in much stronger shape, and central banks much better armed with foreign exchange reserves.

The region’s economies have also been faster and more convincing in their recovery over the past six to 12 months. Many challenges remain, none the least from how and when to exit the large spending measures put in place during the crisis, and how and when to tighten monetary policy (as inflation starts to rise), but if there’s one place that offers any sort of sanctuary right now, it would be Asia.

The region needs Europe and the U.S. to keep buying its products, but intra-regional trade has taken up some of the slack, particularly from China.

Sounder economic fundamentals and a stronger banking system mean Asian markets may soon appear more attractive to investors in currencies and stocks (and also the better Asian credits), even if the Greek wobbles continue. It would take a lot more than what we’re currently seeing to suggest we’re heading anew for some sort of global banking or debt crisis.
That may mean the declines start to slow over the coming week as value appears.

Alan Abelson characterized this titanic standoff so well in this past weekend’s edition of Barron’s: “Who would ever have thought that simple and bland admonition would trigger a confrontation between the world’s two greatest powers.”  He was of course talking about the flap between Google and China (those two superpowers) and Google’s claim last week that it had suffered cyber attacks that have been traced back to China.

Well, more fallout today: Google has delayed the China launch of two new mobile phones that use its new operating system. So far, neither is flinching. Which begs the question – which one needs the other one more? Stay tuned.

The Obama administration’s decision to slap fat tariffs on Chinese tire imports by invoking what amounts to a trade-relations loophole (known as a “safeguard” provision) is a political mistake and poor policy that undermines our trade clout with China. The U.S. president has scored short-term points with labor interests, but the country can’t afford this in the long-term. It’s disappointing to see the U.S. Trade Representative’s office fumble in such a way, given its officials’ hitherto disciplined – and productive – stands on U.S.-China trade matters. In the past few years the USTR has taken tough, measured positions with regard to Beijing’s efforts to skirt World Trade Organization rules – and by and large the U.S. has prevailed via conventional WTO processes. I’m thinking principally of the conflicts over video pirating, and also foreign financial information. It’s telling that the American tire industry didn’t push for the new tariffs; companies that make tires in plants scattered across the globe are continually on the hunt for the lowest labor, material and shipping costs – precisely so they can sell a full range of cheap-to-upscale tires abroad – and, yes, at home to penny-pinching U.S. consumers. It’s just so obvious: globalization is here to stay; we’d better get used to it and stop pandering to labor unions and niche businesses (textiles, garlic growers, bee keepers facing Chinese competition) which, frankly, have to adapt or die. All this said, China is an utterly unreliable trade partner and the U.S., with Europe, mustn’t hesitate to use WTO and other forums to keep it in line. If only the U.S. government had done so in the tires case.

This summer we’ve learned quite a lot about the cost of doing business in China, thanks to the Rio Tinto case, and the Green Dam web-filtering software fracas. Today, we were reminded of something we already knew: that foreign firms which want to  do business in China usually, if not always, have to go through some sort of Chinese entity. What happened today is the World Trade Organization ruled against China for forcing U.S. media producers to route their business in China through Chinese state-owned firms. This echoes last year’s settlement in which China agreed that the state-run Xinhua news agency would no longer serve as sales agent and regulator of foreign providers of financial information even as it competed against them. (Full disclosure: this case affected Dow Jones and our competitors.) All this – Rio, Green Dam, WTO, Xinhua and more – adds up to a litany of business hazards to those venturing into China. As I’ve written before, however, none of this will stop the flow of foreign firms into China. It will just make Chinese commerce costlier. Surely, CFOs and corporate risk managers ’round the world are tapping fresh figures into their calculators as they assess what it takes to compete in China circa August 2009. Low labor costs, a fast-growing economy (at an 8% annual pace despite the economic crisis), a rising middle class, vast regions populated by increasingly modern factories – it still amounts to a compelling proposition despite China’s statist, anti-WTO and anti-competitive tendencies. We should prepare for many more years of WTO cases as China, which joined the organization in 2001, clings to its practices as Beijing’s leadership weans its business and political cadres off the goodies they’ve grown accustomed to while “partnering” with foreigners. It will take many years, and certainly an economic crisis isn’t the time for the central government to deprive too many influential colleagues of their livelihoods.