Subprime Fears Pelt Asia's Markets

Investors lose faith in the idea that China and India can withstand a slowdown in the U.S. and punish Asian shares

by Bruce Einhorn

A pedestrian walks past an electronic share-prices board in downtown Tokyo, Jan. 16, 2008. The Tokyo Stock Exchange's benchmark Nikkei 225 index fell 468.12 points to close at 13,504.51, a level not seen since October, 2005. KAZUHIRO NOGI/AFP/Getty Images

So much for the theory that a U.S. slowdown won't hurt Asia. For months, many Asia watchers have predicted that strong demand in China and India would allow the region to "decouple" from the U.S., Asia's traditional engine of growth. For today at least, investors lost faith in that theory. Stock markets across the region plunged Jan. 16, following scary news from the U.S. about huge losses at Citigroup (C), disappointing numbers from Intel (INTC), and surprisingly weak U.S. retail sales figures for December.

The bad news from the U.S. set off a rout in Asian bourses. Worst hit was Hong Kong's Hang Seng index, which fell 5.37%. Hong Kong-listed computer maker Lenovo, which owns IBM's (IBM) old PC business and is trying to boost share among American consumers, dropped 7.6% and is down 30.6% so far this year.

Investors also hammered stocks with U.S. exposure in Japan, where the Nikkei index fell 3.35% and Sony (SNE) dropped 6.8%. Elsewhere in Asia, Shanghai fell 2.8% and Seoul was down 2.4%. There was no relief in Southeast Asia, where Singapore's Straits Times index was off 3% and the benchmark Indonesian index plunged 5%. India's Sensex index fell almost 2%. "Most people who were talking about [decoupling] are now saying that the world is recoupling again," says Stephen Green, senior economist in Shanghai for Standard Chartered Bank.

Chinese Exporters Could be Hurt

Even mighty China may not be immune. "American consumers have been using their homes like ATMs," Morgan Stanley (MS) Asia Chairman Stephen Roach said at a conference Jan. 13 in the southern Chinese city of Sanya. "That game is over. If the U.S. consumer falters, China is going to feel it."

The worry among investors now is what faltering demand from the U.S. means for Chinese exporters. "Export-related companies are definitely going to have a tough time ahead," says Tony Yam, chief investment officer at SMC China Fund, a hedge fund investing in Chinese shares. One quarter of the country's exports go to the U.S., and another 35% go to European countries, many of them also facing serious downturns.

Chinese exporters, suddenly unable to find as many buyers in the West, might try to sell more of their goods at home. That would put downward pressure on prices in China and threaten some local companies (BusinessWeek.com, 11/15/07). "You could see some corporate distress, which impacts banks, supply chains, and suppliers," says Green, who predicts Chinese gross domestic product growth will fall to 9.5% this year from 11.5% in 2007.

Foreign Money Exiting India

The Chinese government has been taking steps of its own to cool down the economy. In the latest move, Beijing said, effective Jan. 25, it would raise the reserve requirement for Chinese banks by 50 basis points, to 15%, the 11th such increase in the past year. The government has also cooled on an idea floated last summer of allowing Chinese investors to put their money into stocks in Hong Kong. Optimism about the "through train," as people in Hong Kong have called that proposal, helped send the Hang Seng index soaring in late 2007. Since November, though, the index has dropped 25% as investors have lost confidence that Beijing will allow that train through quickly.

A quick turnaround is unlikely.