Asian investors must question growth story

By Richard Hubbard

HONG KONG (Reuters): As Asian asset prices slip toward 1997 crisis levels, investors increasingly face a choice between buying the growth story or accepting the region may be running out of steam before getting back on its feet.

Asia's economies are growing strongly as measured by rising real Gross Domestic Product (GDP) levels and, although expected to slow a bit next year, these rates should remain strong.

Year-on-year growth rates for Hong Kong, Korea and Malaysia reached double digits in the first half of this year, while China, Singapore and Thailand were in the high single digits. Only Indonesia and the Philippines are posting weak growth.

But analysts also note that the real GDP numbers don't tell the whole story and actual rates of economic activity, which are falling short of pre-crisis levels, may be a better guide.

"GDP numbers are increasingly questionable," said Jim Walker, chief economist of Credit Lyonnais Securities (Asia) Ltd.

"Statistical discrepancies and inventory machinations are accounting for large amounts of the actual GDP number. These balancing items are no more than a fudge," he said.

In Walkers' view the true story is indicated in figures like bank credit, fiscal revenues, retail sales and industrial production -- these he says tell another story.

"Asian governments may fool investors by reports of strong GDP (in real terms) and widespread recovery," he said.

"But the nominal numbers, bank's unwillingness to lend and, eventually, the corporate earnings data are telling a quite different tale."

"Corporate skeletons are falling out of the cupboard, but the Jolly Roger is flying over too many regional statistical bureaux," he said.

Perhaps the recovery is actually coming to an end and, with all the problems still in the economies of the region, investors should be pricing in the inevitable.

"The Asian economic recovery has peaked," said Deutsche Bank's chief economist, Michael Spencer.

Spencer argues that growth will slow over the next six quarters as the international economy slows and governments have to reign in large budget deficits.

The question then becomes how much will domestic demand or investment activity support an economy.

Spencer concludes that consumption in many Asian countries is linked to export growth and therefore may not prove the savior. Investment on the other hand is tied to a financial system's health, and that varies substantially around the region.

"The two fastest growing economies in the second quarter were Korea and Hong Kong, followed closely by Malaysia and Singapore. In contrast the Philippines, Indonesia and Thailand continue to lag far behind.

"We expect growth in the region to continue to reflect this geographical division," Spencer said.

However, this view does not account for the poor performance of Korea's stock market, which is second only to Thailand as the region's worst performer in Asia this year.

CLSA's Walker has an explanation for Korea's problems.

He said in Korea the economy was on track for nominal GDP growth in 1999 and 2000 of an average 11.2 percent. However, between 1990 and 1996 this average was 15.9 percent.

"Korea is only growing at 71 percent of its early 1990's rate and is expected by everyone to slow from here," Walker said.

This disparity between pre-crisis nominal growth rates and post crisis levels holds true for most of the region, according to Walker.

For example Hong Kong, which has posted double digit growth for two consecutive quarters this year, is only growing at 15 percent of its 1990 to 1996 average nominal growth rate.

So while Asia's recovery is under way, economic activity in many countries is still well below the levels seen prior to the crisis by some measures.

Walker argues that if the current level of underperformance continues it will become much more difficult for banks and corporates to grow their way out trouble.

Is this the reason for weak asset prices or is there a third culprit -- the mighty U.S. dollar.

Asset markets in Australia and New Zealand have already been battered by the resurgent U.S. dollar while, in Australia's case, the economy is fundamentally strong. Is the same phenomenon at work across Asia?

Australia's Macquarie Bank argues that it is. Regional economist Li Lian Ong said many currencies in Asia have actually strengthened against OECD currencies this year.

"People are just so focused on the U.S. dollar right now," Ong said. "And the high tech markets like Korea, Hong Kong and Singapore are suffering the effects of the Nasdaq sell-off," she said.