Decline of Asian Markets Following New Signs of Recession

Stock prices on Asian markets have significantly fallen this morning as new news about the weakening of the Japanese, Chinese, Australian, and British economies has revived investors’ fears of a prolonged global recession.

On the Tokyo Stock Exchange, the Nikkei index plummeted 3 percent this morning, diving again below the psychologically important level of 9,000 points. On the Australian stock exchange, stock prices fell by 3.6 percent. In Hong Kong, the Hang Seng index dropped by 0.6 percent, while stock prices in South Korea and Taiwan fell by more than 2 percent. As prices fell on other Asian markets, including China, the MSCI Asia-Pacific index, excluding Japan, fell by 3.1 percent this morning.

Investor optimism, spurred yesterday by the announcement from the Chinese government that it would invest $586 billion in infrastructure and other projects to stimulate economic growth, quickly faded after new data indicated a weakening of the world’s fourth-largest economy. This morning, it was reported that inflation in China fell to 4 percent in October, and it is also expected that import growth will slow. This indicates an ‘cooling’ of the economy, which weakens hopes that China’s growth could alleviate the global economic crisis.

"These data indicate a sharp slowdown – production is falling, as is demand," said Zhang Yongjuan, a prominent Chinese analyst, after the inflation data was released. What began last year as a financial crisis, triggered by falling prices in the U.S. real estate market, has metastasized into an economic crisis in developed countries, and the domino effect has also impacted emerging economic powers like China, analysts explain. The weakening of demand worldwide is also indicated by the fact that in the first 20 days of October, Japan’s exports fell by almost 10 percent, which is yet another signal that the world’s second-largest economy is on the brink of recession. South Korea is facing even greater problems. Its exports in the first 10 days of November fell by as much as 26 percent compared to the same period last year.

The situation is no better in Britain, where it was announced yesterday that retail sales in October fell for the fifth consecutive month, at the highest rate in more than three years. The British economy is on the brink of recession, given that it recorded a decline in the last quarter. Among the few pieces of good news is that the decline in interbank lending rates continues and liquidity is improving, which could mean that the worst phase of the credit crisis is coming to an end, analysts say. However, the consequences of that crisis will surface for some time. Thus, yesterday the U.S. Fed reported that it would purchase shares of American International Group for $40 billion. This brings the costs of rescuing the largest U.S. insurer to $150 billion. In the last quarter, AIG reported a loss of $25 billion.

However, this is not a record loss for a U.S. financial institution. Last night, Fannie Mae reported a quarterly loss of as much as $29 billion. Additionally, this largest U.S. mortgage lender reported that the recent government assistance of $100 billion will not be sufficient as real estate prices continue to fall, and the number of Americans unable to pay their mortgage installments is rising, leading to increased credit losses for the company. Thus, Fannie Mae’s credit losses in the last quarter reached $9.2 billion, while a year earlier they amounted to $1.2 billion.

American Express reported last night that it has received approval from the market regulator to transform into a bank holding company. The fourth-largest U.S. credit card issuer will thus be able to receive government assistance and reduce its financing costs. As a bank holding company, American Express will be able to issue bonds guaranteed by the government and seek assistance from the state, in accordance with the recently passed $700 billion bank rescue law. AmEx has found itself in trouble as its financing costs have risen due to the crisis in financial markets and as the number of Americans unable to meet their obligations has increased.

After this bad news, the question arises of how much more the U.S. government will spend on the rescue of financial institutions like AIG and Fannie, and whether it will have funds to assist the automotive industry to prevent the collapse of General Motors, which is dangerously threatened by a disruption in operations due to insufficient liquidity. Additionally, numerous companies are reporting significantly weaker business results due to falling demand worldwide. Last night, for example, Starbucks announced that its profit in the last quarter fell by as much as 97 percent. Due to weakening demand, this coffee shop chain began closing its ‘cafés’ in the U.S. and Australia last summer. Due to all this bad news, analysts believe that the U.S. economy is sinking into a recession that will be longer and deeper than those of 2001 or 1990-91. (H)