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A nervous Asia watches U.S. financial turmoil

Han Seung-woo is casting a wary eye on the financial crisis erupting halfway around the world on Wall Street.
/ Source: The Associated Press

Han Seung-woo is casting a wary eye on the financial crisis erupting halfway around the world on Wall Street.

From garment makers in southern China to real estate agents in India, businesses across Asia are worried that the turmoil will filter through to them.

"I'm watching nervously," said Han, the president of Sam-A Techno Solutions, a technology services company in Seoul with 10 employees and annual sales of 3 billion won ($2.7 million).

Even before the past week's dramatic events, the economic slowdowns in the U.S. and Europe were dragging on Asia's biggest economies in Japan, China and South Korea. Now, the worry is it could get worse.

The fears highlight the growing realization that Asian economies have not "decoupled" as much from their longtime dependence on the U.S. market as some had previously thought or hoped.

"Right now people somehow conclude that decoupling is a myth," said Citibank Korea economist Oh Suk-tae.

Lending has tightened around the world as Western banks stagger under the weight of billions of dollars in bad loans and mortgages that have accumulated from the wave of U.S. home foreclosures.

Those woes led to one of the most unforgettable weeks in financial history: major U.S. investment bank Lehman Brothers Holdings Inc. filed for bankruptcy, Bank of America bought Merrill Lynch & Co. and the Federal Reserve bailed out troubled insurer American International Group Inc. — sending shock waves through global markets and fanning fears of a worldwide financial meltdown.

World markets rallied Friday on news of a U.S. government plan to rescue banks from billions of dollars in bad debt.

Han, the South Korean businessman, said if the bailout plan stabilizes the U.S. economy and exchange rates, that would obviously be positive.

But whether the worst is over remains to be seen, and the economic outlook is still plenty murky for businesses across Asia, especially smaller ones that lack the financial resources of larger corporations.

"We're OK until the end of the year, but I have no idea what 2009 will look like," said Christopher Fussner, president of Singapore-based electronic equipment distributor TransTechnology, which has 165 employees in nine Asian countries. "My clients are trying to digest what's going on."

Volatile markets also could undermine consumption and investment in Asia. Already, corporate borrowing costs are rising as investors demand a greater premium on corporate bonds, creating a drag on investment in the region.

"We have a perfect storm in the making," said Ifzal Ali, chief economist at the Asian Development Bank in Manila.

He predicts the Wall Street meltdown means U.S. economic weakness will last longer than thought, at least through 2009, seriously hurting exports from Asia, particularly China.

Shrinking demand for India's information technology companies and the withdrawal of global financial services companies from India will weaken property values and hit the outsourcing industry hard, predicts Anuj Puri, India country head of Jones Lang Lasalle, a real estate company.

"The IT sector is going to take a beating," he said, adding that he is going to shift his strategy to focusing more on domestic clients instead of foreign ones.

The pandemonium on Wall Street has added to anxiety for Chinese exporters that already have seen demand in key American markets decline.

"When we first heard the news, we were like, 'Oh, my! Why is the economy doing this again?' You know everyone is waiting for an opportunity to breathe, to recover," said Lu Lingru, trade manager for Tianji Leisure Products Ltd.

The 110-employee company in Zhejiang province in China's southeastern export belt sells gazebos, garden umbrellas and outdoor furniture and depends on the United States for all its sales.

"Certainly, this is going to affect our business," Lu said.

The company will be fortunate to equal last year's sales of 150 million yuan (US$22 million), Lu said, and is trying to persuade customers not to demand price cuts.

Likewise, in southern China's Guangdong province, garment exporter Zhongshan Maochang Garment Co. has already been under pressure from higher labor and material costs.

"Now, it's not easy to get orders from other countries because of the worldwide economic crisis," said Duan Zhihui, foreign trade sales manager. "On the other hand, when you do have orders, profits are shrinking," she said.

Not all think the situation for Asia is dire.

Subir Gokarn, chief economist for Standard & Poor's in New Delhi, says the region might not have decoupled but trends in recent years have insulated it from shocks in the U.S. economy.

"There will be an impact but there are forces within the region — domestic demand in India and China and the ability of other countries to tap into that growth — that will partially offset global developments," he said.

Exactly how Asia will ride out the current economic threat remains unclear, but some are bracing for a tough go.

"You have to stay flexible," said Kenneth Yu of Hong Kong. The 55-year-old businessman matches foreign investors with mainland companies looking for funding, an endeavor he says has become harder since the credit crunch began last year.

"I have to respond to different problems and crises ... otherwise you cannot survive," said Yu, who has engaged in various businesses in China. "But surviving is becoming more and more difficult than before."