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How long will Greenspan's cuts boost Asia?

By William Pesek
BLOOMBERG
Sunday, Jun 15, 2003, Page 12

`[Asian's] endured nearly six years of complaints about Asia's crony capitalism. Close ties in Asia between government, business and markets were held up as examples of how not to run a financial system. Now a similar spotlight is on the US, and Asians may be allowed a tinge of satisfaction.'

Traveling around Asia, it's hard not to view the global economy as a vast web of interconnected strings, all attached to Alan Greenspan's brain.

An overstatement, perhaps, though Asians know nothing will boost their economies like a US recovery. The last two years of tepid US demand haven't been much fun and explain why many folks are counting on US Federal Reserve Chairman Greenspan to revive global growth.

The Fed, for better or worse, has become a global central bank. Sure, it has 12 districts in the US and makes decisions based on domestic events. But the Fed also oversees the biggest economy in a world marked by globalization. It's not farfetched to think of Latin America as a 13th district, Southeast Asia 14th, China 15th, and so on.

The good news is that low US rates are beginning to help Asia. The Fed's policies are boosting US stocks, a dynamic that's pulling Asian equities higher, too. The dynamic is also driving down the dollar. The stronger euro -- up 12 percent versus the dollar this year -- is increasing European purchasing power and boosting trade for Asia.

Some Fed-created liquidity is going to China in the form of investment, helping Asia's second-biggest economy maintain growth in a region grappling with SARS, or severe acute respiratory disease. China is buying more and more goods that other Asian nations used to export to Japan.

Whether US monetary policy can continue to boost Asia's economies is doubtful, especially in the long run. Asia needs to make more progress retooling an exports-mean-prosperity model and shed this trap of dependence on foreign demand.

Meantime, all eyes are on the Fed. Asia hopes Greenspan is right and that the Fed's interest-rate cuts will result in stronger US growth. If so, the US would again be the ``oasis of prosperity'' that it was in the late 1990s.

That's a big ``if'' -- and it should make investors in Asia wary. The US enjoys a large and enthusiastic cheerleading section, led by Greenspan and myriad economists. Viewed from abroad, the US has credibility problems. It doesn't help that the Fed's overnight bank rate already is at 1.25 percent, leaving little room for further cuts.

News this week that Freddie Mac ousted its top three executives amid a probe of its audit seemed to echo other recent accounting scandals. The federal investigation validates a view in Asia that US corporate governance needs reform.

For Asians, it's personal. They've endured nearly six years of complaints about Asia's crony capitalism. Close ties in Asia between government, business and markets were held up as examples of how not to run a financial system. Now a similar spotlight is on the US, and Asians may be allowed a tinge of satisfaction.

A bigger risk for Asia is that the US catches ``Japan disease,'' characterized by a business cycle that falls and can't get up again. The fear in Asia is the US will try to paper over its problems with easy money and lower taxes, only to have the same problems reemerge in the not-so-distant future.

For now, the Fed's rate cuts are filtering across the Pacific. Rising US stocks helped push the Nikkei 225 Stock Average into the black; it's up 3.63 percent this year. Ditto Hong Kong's Hang Seng Index, up 3.66 percent this year. Stocks in China, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand also are all up.

US consumers may not be rushing to shopping malls or airports, though Asia has its hopes. The mere expectation of US households and companies embarking on a new spending spree is enough to boost stocks these days.

The dollar's slide this year has also been a plus. China, Hong Kong and Malaysia effectively tie their currencies to the US and become more competitive as the dollar slides. Currencies like Indonesia's, Singapore's, Taiwan's and Thailand's are kept within tight ranges relative to the dollar's value.

So Asia has benefited as the Fed moved to cut short-term rates to their lowest in 40 years. The gains won't last, however, unless Asian governments cut their dependence on the US economy.

Only then will investors regain confidence in the region.
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