KONGAsian stock markets have had a struggle to share in U.S. investors'
rediscovered, if muted, enthusiasm for stocks in general and the Nasdaq in
This sluggishness may seem surprising
given that Asia is supposed to be the prime beneficiary if the U.S. economic
downturn and retrenchment prove neither as steep nor as long-lasting as was
Divergence in performance may seem
especially surprising given the widespread belief that the United States is at
the end of a record expansion while Asia is still in a recovery phase, albeit
one in danger of being stopped in its tracks. There are local reasons for this.
Southeast Asian markets, with the partial exception of Thailand, have been
battered by political woes.
The South Korean and Taiwan markets have
gained a little this year but without much conviction and are haunted by worries
about semiconductors. China's Hong Kong-listed H shares, up 27 percent this
year, are the only significant international share class to have shown sustained
upward momentum. The most likely overall explanation for Asia's divergence from
the Nasdaq lies in the relative rates of monetary growth. Exceptionally rapid
monetary expansion in the United States could well be papering over some cracks
in the foundations of economic growth. Meanwhile, almost the whole Asian region
has been suffering from low or declining money growth, and in some cases
Demand for money has been even weaker
than supply so that interest rates have continued to fall, spurring capital
outflow and debt repayment, which mostly have offset large current-account
U.S. monetary growth is astonishing to
those overseas who still believe in theories about the relationship of the
quantity of money to inflation rates. U.S. broad money supply, or M3, has been
growing at an annual rate of almost 13 percent this year and at a 9.8 percent
rate over the past 12 months. The growth rates for M2 have been slightly less.
There has been an acceleration since the late 1999 surge, which was viewed as a
short-lived precautionary accommodation to cope with the transition to the year
U.S. reality since then hardly
constitutes the "tight" monetary policy for which critics have attacked Alan
Greenspan, the chairman of the Federal Reserve. The acceleration in M3 from a
high level in late 2000 to the current extreme rate of growth appears to have
been a response to the turnaround in U.S. growth and stock market expectations.
In contrast, Asia has moved in the
opposite monetary direction.
Hong Kong, which ought to benefit from
its peg to a strong dollar as well as strong growth in China, has seen a 0.5
percent fall in M3 so far this year. Growth over 12 months has been just 4.5
percent. Singapore has had no M3 growth in over 12 months and only 2 percent in
South Korea's 12-month M3 growth is still
buoyant at 8 percent, but the rate has been declining steadily and has been at
an annual rate of just 4 percent since the end of 2000. Taiwan's money growth at
around 5 percent is at or slightly below its growth rate for the gross domestic
The most extreme case is Malaysia, where
a pegged currency and political uncertainty led to a contraction in all measures
of money supply in March, leaving them below their end-2000 levels, despite the
fact that Malaysia's current-account surplus has been running at $10 billion.
The flow of excess capital and dollar
loan repayments from Asia to the United States has been helping sustain U.S.
demand and currency strength. It is worrying, at least in the short term,
particularly for those looking for Asian financial asset appreciation. But those
looking further ahead may see the surge in U.S. financial sector credit,
particularly the refinancing of home mortgages, as the last gasp of a
Meanwhile, the levels of inflation in the
United States and Asia seem to be going in opposite directions. The U.S. uptick
will probably persist for the rest of the year because of the lagging impact of
wage increases and declining productivity growth. Inflation is low in most of
Asia, in some cases despite currency weakness. It is close to zero in Taiwan,
Singapore, China and Hong Kong, and very low in Malaysia and Thailand. In South
Korea it is around 4.5 percent but expected to fall.
The contrast between money and credit
growth in Asia and the United States is startling. Asian economies have slowed
sharply but are mostly still managing to grow at least as fast as money supply.
In the United States, the accelerating money growth is being associated with
declining economic growth and rising inflation. So far this has benefited U.S.
financial assets compared with Asian ones. The question now facing investors is:
For how much longer?