East Asia’s Crisis Deepens as It Nears 1st Anniversary

East Asia’s currencies and stock markets are in a new downward spiral that threatens to further destabilize the region, while raising troubling questions about how far off a true recovery may be.

On Wednesday, the region’s stock markets suffered huge declines--even by their volatile standards--in the wake of the deaths of six Indonesian students shot by security forces during an anti-government demonstration in Jakarta.

Indonesia’s main stock index dove 6.6%, bringing its decline since March 31 to 26%. The plunge pulled Hong Kong stocks down 3.9%, Singapore down 4.9% and Malaysia down 3.7%.

Every major East Asian stock market has tumbled anew in recent weeks, after bouncing up in January and February following last year’s collective collapse.

The Hong Kong market, for example, has slumped 18% so far in the second quarter after rising 7% in the first quarter--a modest rebound after last year’s 20% drop.

Nearing the one-year anniversary of Thailand’s currency devaluation--the firecracker that eventually exploded the economy of the entire region--many economists and money managers are growing less hopeful, rather than more hopeful, that the crisis is bottoming.

“This is as bad as any financial and economic situation can be,” said Allen Sinai, chief economist at Primark Decision Economics in Boston.

Worse, there have been new rumors in recent days that China and Hong Kong will opt to devalue their currencies soon, to halt the erosion in their competitive positions caused by their still-strong currencies relative to the deeply devalued currencies of most other East Asian countries.

As currencies of Indonesia, South Korea, Malaysia, Thailand and others have collapsed in value over the last year--the result of fleeing foreign capital and the debilitatingly heavy corporate and government debt loads that now burden those economies--China and Hong Kong have repeatedly insisted they will maintain their currencies’ values.

But strong Chinese and Hong Kong currencies mean their devalued rivals are gaining a substantial export-pricing edge. That is already reflected in slowing Chinese exports, which rose just 8% in April versus a year earlier. China’s economy overall in the first quarter grew at the slowest pace in seven years.

If either China or Hong Kong--or both--should finally devalue, they could trigger a new round of “beggar-thy-neighbor” devaluations across the region, with severe financial implications, analysts warn.

Besides those worries, East Asia’s markets are being hammered by the rising unrest in Indonesia, new labor strife in South Korea, and concerns that Japan’s economy is rapidly falling into recession again, instead of leading Asia out of its mess.

What is becoming clear, experts say, is that East Asia won’t follow the script written by Mexico in 1995 and 1996, after the Mexican peso was drastically devalued in December 1994.

Despite a deep recession in 1995, Mexico’s economy rebounded relatively quickly in 1996. Its stock market began to recover even earlier--by spring of 1995.

Instead, South Korea’s stock market, which hit an 11-year low in December, eclipsed that low in early trading on Wednesday.

The economic pain across Asia, many experts say, will cut far more deeply than was the case in Mexico.

“Mexico had 85% of its exports going to the United States,” Sinai said. “One could see a way out for them,” thanks to even-cheaper exports in the wake of the currency devaluation, and thanks also to Uncle Sam’s willingness to financially back the Mexican economy, and banks, with Treasury loans.

In East Asia, while the International Monetary Fund has put rescue plans in place for many of the countries, those plans are small relative to the scale of the debt problems faced by Asian banks and companies.

Yet some analysts say the East Asian crisis is, in fact, unfolding much as was expected last fall. Thomas Trebat, emerging-markets analyst at Citicorp Securities in New York, argues that South Korea and Thailand, at least, have begun to see financial stability return, even though the hardship of massive bankruptcies continues to take a toll.

“Financial stability has to come first,” Trebat said, meaning investors must get the sense that the inevitable shrinkage of the countries’ banking systems can be managed without threatening a new round of capital flight and currency devaluation.

That nascent financial stability could be undermined, Trebat acknowledged, if China or Hong Kong devalues--but he doesn’t expect them to do so.

Still, as stock prices sink further in the region, Trebat argues that “I don’t think one buys equities in markets like these.” The survivors among East Asian companies, he said, are still difficult to identify.

Michael Gerding, manager of the Founders Worldwide Growth fund in Denver, is more gloomy. “I don’t think this is the end” of the slide in stock prices in East Asia, he said, even as many key markets near multiyear lows again.

“I continue to think the model for this is Japan,” Gerding said. Unlike in Mexico’s case, “What we’ve seen is a bursting of an asset bubble” in East Asia, just as Japan’s bubble burst in 1990, he said.

The washout of that speculative excess, Gerding said, will take years, as it has in Japan. “I think we’re going to have chances to buy [Asian] stocks a lot cheaper.”

For the United States, Asia’s pain has so far been our gain, at least in terms of cheaper exports. What’s more, the Federal Reserve Board may again be forced to refrain from tightening credit if it appears that Asia is headed for a deeper decline that could threaten the world economy.

Tom Petruno can be reached by e-mail at tom.petruno@latimes.com.

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New Plunge

After rebounding somewhat in the first quarter from last year’s plunge, Asian stock markets are again plummeting in the second quarter as the region’s economic crisis deepens. Changes in main market indexes:

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1st Qtr. 2nd Qtr. S. Korea +28% --26% Indonesia +35 --26 Malaysia +21 --24 Thailand +23 --19 Singapore +6 --18 Hong Kong +7 --18 Taiwan +11 --10 Japan +8 --7 Philippines +20 --3 U.S. (S&P; 500) +14% +2%

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Note: All markets measured in native currencies.

Source: Bloomberg News