Asia’s Outlook Turns Murky After the 2008 Crisis

September 11, 2013, 2:51 p.m. ET

Asia’s Outlook Turns Murky After the 2008 Crisis

Region Roared Ahead of West, but Ground Has Shifted; Debt Levels Rise



HONG KONG—The early verdict on the global financial crisis was that Asia came out on top. Strong banking systems and a government-directed lending spree in China quickly boosted the region’s economies back to growth. By 2010, investors were betting that there had been a permanent shift in the balance of economic power. They pushed Asian stock markets and currencies to record highs. Just over two years after the failure of Lehman Brothers, Asian stocks were up 40%, outperforming U.S. stocks by 42 percentage points.Five years post-Lehman, Asia’s diagnosis is far murkier. Some players in financial markets have learned from the crisis, or benefited from it in other ways. At the same time, certain nations have weakened their defenses against a financial crisis, or could be the source of new trouble.

Asia paid for some of its growth with debt and got another boost from monetary stimulus in the U.S. and Europe that drove down interest rates. Investors seeking yield sent capital flooding to fast-growing markets. Now, the region is struggling as capital flows out and high debt levels raise concerns about future growth.

“The next couple of years will be tough for financial markets in our part of the world,” said Amar Gill, head of Asian research for brokerage CLSA Asia-Pacific Markets.

For investors betting at the time of Lehman’s collapse, U.S. stocks would have been a better choice than Asian shares. The Standard & Poor’s 500-stock index is up 41% since then, six percentage points ahead of a widely followed MSCI index for Asia, excluding Japan.

The crisis initially hit Asia hard. Cargo ships idled in port in Hong Kong and Singapore as exports collapsed, banks hoarded dollars and trade finance disappeared. Factories in southern China sent millions of workers home and told them not to come back. Financial markets plunged and small investors’ funds were frozen or lost when products tied to Lehman Brothers collapsed.

But the rebound from the crisis came early and stronger in Asia. China’s stock market reached bottom in October 2008, six months before the rest of the world.

In late 2008, Beijing directed its state-owned banks to open the spigot of credit to counter the effects of plummeting exports. That new debt kick-started a building boom that yielded bridges, railroads, hotels and housing. An increasing portion of China’s economic growth came from debt-funded spending on infrastructure, rather than exports.

Growth in Asia soared in 2010 and 2011, in part because China’s building boom raised demand for imports like Indonesian coal, Thai rubber and Korean excavation machinery. But the wave of spending didn’t last; China’s economy will likely expand this year at the slowest rate since 1990.

“The old investment model has reached the end of its shelf life. Increasingly the debt model is also reaching the end of its shelf life,” says Andrew Sheng, Hong Kong’s former top securities regulator and president of the Fung Global Institute, a think tank.

Positec Group, a Suzhou, China, maker of Rockwell- and Worx-brand power tools and garden equipment, suffered as exports fell in 2008, but never had trouble borrowing. Five years later, exports are up but Chinese banks’ ability to lend is a source of concern. Many observers worry the post-Lehman lending boom has left banks stuffed with bad debts.

“Now we might be due for some kind of crisis in China,” says Tom Duncan, chief executive officer of Positec’s U.S. operations. “We’ve been trying to diversify our funding as much as we can, in case something did happen and credit markets seized up.”

The crisis in the West led to several important shifts in Asia. Perhaps the most important was China’s decision to allow its currency to be used overseas, a response to the seizing up of dollar-denominated lending during the crisis. Today, more than 11% of China’s goods trade is denominated in yuan rather than dollars, compared with none in 2008, when such cross-border yuan transactions were illegal.

While parts of Asia have been hit recently by the expected end of monetary stimulus in the West, there is relief in some quarters that matters didn’t turn out worse. South Korea, for example, could have owned Lehman Brothers.

Jun Kwang-woo was head of Korea’s top financial regulator in 2008 and nixed a deal for state-owned Korea Development Bank, known as KDB, to take a big stake in Lehman the summer before it collapsed. When the deal fell apart, Lehman’s stock plunged 40%.

“KDB was too small a boat to save the sinking Titanic. Looking back, I still think I was right,” says Mr. Jun, now a professor at Yonsei University in Seoul.

“If KDB was seriously entangled in the Lehman takeover process, that would have made Korea’s recovery much more complicated.”

Korea’s currency plunged after Lehman failed due to its banks’ reliance on foreign borrowing, a weakness regulators say has been reduced greatly in the years since.

Some Asian banks have found ways to benefit from the aftermath of the crisis. Southeast Asia has boomed in recent years and some of its banks seized the moment to expand. CIMB Group Holdings Bhd., Malaysia’s second-biggest bank, acquired the Asian investment-banking business of battered Royal Bank of Scotland Group PLC in 2012. “We certainly don’t get overawed by venerable Western banking names anymore,” says Nazir Razak, CIMB’s chief executive.

“Our banks do not undertake complex activities and are not so exposed to other banks outside their own countries,” Mr. Nazir says. “If there is a mega Asian bank failure then it would probably come because there has been some misreporting or fraudulent activity.”

The final chapter on the impact of the financial crisis will play out when monetary stimulus ends in the developed world, allowing interest rates to rise there, pulling money away from Asia. India and Indonesia are struggling with worrisome current-account deficits, and attracting the dollars they need could become more difficult. Debt levels are higher than before the 1997 Asian financial crisis, limiting the options of policy makers.

“The availability of hot money the past few years set in complacency” in some Asian countries, says Mr. Sheng. “You can’t take these inflows for granted.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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