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The trades of Asia

The shaky world economy, allied with inc-reased geo-political tension, continues to weigh heav- ily on equity markets.

In recent years, much of the world&#39s loose capital flowed to the US, all of which was gratefully received and much of which was promptly wasted.

The flow of global capital is undeniably important to stockmarkets. It is also of great importance to economies – at least for those economies that are open to such flows. However, the pools of capital available globally exceed the number of managers with the competence to allocate this capital properly.

As a classic example, there is some 50 million kilometres of fibre optic cable laid in the ground of which perhaps 99 per cent is presently unused.

Those who do not learn from history are condemned to repeat it and the technology excesses in the US were

pretty much a repeat of Asia&#39s boom and bust and indeed a repeat of the savings and loan crisis in the US in the 1980s.

Can we argue that Asian economies, having already been through the mill, could perhaps offer a safer home for funds?

In terms of creative destruction, Darwinism, and survival of the fittest, lessons have certainly been learned in Asia. In South Korea, we have seen some dismantling of the chaebols, the huge and hugely indebted conglomerates that ruled corporate Korea. In particular, the system of intra-chaebol cross-guarantees, whereby the viable subsidised the non-viable and the non-viable thus imperilled the viable, has all but disappeared.

Hong Kong has sought to reinvent itself as cyberport, pharma-port, regional television and telecommunications hub and has successfully wooed The Walt Disney Company

Singapore has introduced greater numbers of foreign executive talent and has encouraged its government-linked (and controlled) companies to expand outside Singapore. For example, we have seen large-scale corporate transactions, with Development Bank of Singapore buying Dao Heng Bank in Hong Kong, and Singapore Telecom buying Cable & Wireless Optus in Australia.

The most fundamental change has been in Indonesia where the 32-year “New Order” regime of President Suharto was overthrown.

Sadly, while many changes have been made as a result of the late 1990s&#39 crisis, not enough changes have been made. Bail-out has followed bail-out has followed bail-out and en bloc banking systems in South Korea, Indonesia, and Thailand remain insolvent.

Hong Kong and Singapore tend to collect the top two places in the indices of “economic freedom” published annually by US right-wing thinktanks but government ownership and influence over Singapore&#39s biggest corporations is higher than it should be. And for all its free-market credentials, Hong Kong lacks a competition law and is consequently riddled with cartels in banking, utilities, port, telecommunications, property, transport. This, of course, greatly increases the cost of doing business there.

China has been popular with investors as the government pump-primed the economy which is likely to show 7.3 per cent real GDP growth for 2001. But equity investors in China are generally minority investors and, regrettably, in Asia and elsewhere a position where one&#39s voting rights are less than one&#39s rights to cashflow is a vulnerable one.

Also, as fast as change may be happening in China, it remains a communist country. For most Chinese companies, the prices they have to pay and/or the prices they charge are not arrived at through market forces, the effect of which smarter businessmen can predict – but are decided by the state. Profits can disappear at the stroke of a pen.

Asia-wide, a study produced last year showed that in the nine most advanced East Asian countries, eight corporate groupings, six of them family-owned, controlled 25 per cent by number of all listed companies. This cannot be good for corporate governance.

As to the future, we have to accept that Asia&#39s role in the global economy is largely a manufacturing one. Labour in Asia is cheap. The anti-globalisation campaigners have focused on US$1 a day as a wage paid by multinationals to developing country employees. But the reality is that US$1 a day, whoever pays it, would be a pay rise for tens of millions of Indonesian workers. In southern China, skilled lab-

our can be had for US$100 a month all-in, board and lodgings included.

Taiwan and Korea make the world&#39s semi-conductors. It is an industry sub-contracted to them by US, Japanese and European technology companies because it is hugely capital-intensive – a plant can cost $3bn –and hugely cyclical. It is not a knowledge business. The intellectual property ownership is not with the Taiwanese or the Koreans. It is a machine-operating business. To be frank, such industries are low down the food chain.

So the world is a hiring hall and jobs go to the lowest bidders who are generally pretty pleased to get them. The trick for countries while “know-ledge” industries are in their front yard is to build up intellectual capital and ensure when the lower value-added jobs go off to China or wherever that higher value-added jobs can replace them.

Asia offers a cheap labour force, it has Hong Kong&#39s and Singapore&#39s deepwater ports and financial sectors, it has China&#39s consumers and workers, and Indonesia&#39s natural resources. Asia can certainly make a case for attracting

capital but it has still to make the case that it can use the

capital productively.

As we have already noted, the Nasdaq disaster in the US tells us that controllers of global capital may not be the smartest. In the short term, allocation of capital can be somewhat capricious and those that do not deserve it are able to attract it. But in the medium to long term, allocation of capital is ruthlessly efficient.

A better managed Asia, with abler executives at corporate and, indeed, country level, with a business sector free of monopolism and conglomeratism, would have attracted and retained much more of the world&#39s capital than it has.

A valid criticism of the US economy is that there has been very little “trickledown”, the wealthy have got wealthier faster than the poor have got less poor. This also applies in Asia. Malaysia built the twin Petronas Towers, the tallest buildings in the world. But within 20 miles of Kuala Lumpur, villagers live in kampungs, with houses made from wood with hemp roofs, untouched by the increased wealth.

It is as difficult to find great statesmen or leadership in Asia as it seems to be anywhere else these days. China&#39s premier Zhu Rongji is well respected and it is no bad thing that Singapore&#39s administration still bears the imprimatur of Lee Kuan Yew.

In China though, it is no secret that the top three are not singing from the same songsheet. There are also undercurrents of discontent in Malaysia. In Thailand, Indo-nesia and the Philippines the administrations are new. Indonesia is now on its third president since Suharto&#39s fall.

So we can make a case for Asian equities as a safe home for funds. It would help if there were now stability in governments, stability of currencies, stronger management in the boardrooms and a real attempt to address 1998&#39s disasters properly before there is a further raft of problems.

Of course, these problems are not unique to Asia and occur globally to varying degrees. But Asia has gone some way towards addressing them, and one could argue that they have yet to surface elsewhere. Rec-ession is the best auditor.

Asia is a warrant on world growth – liquidity in the region is very high, equities are reasonably priced and the capacity glut means that any change in sentiment will see capital flowing into financial assets unne-eded as it is by the real econ-omy. This would translate into very strong equity markets.


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