HONG KONG/TOKYO Aug 21 Asia's economic miracle looks increasingly vulnerable to the end of a decidedly earthly phenomenon - five years of ultra-cheap financing sparked by the U.S. monetary policy dubbed "quantitative easing".
The notion that a region associated with thrift, low debt and high savings is vulnerable to an ebbing tide of global credit is controversial.
But the sell-off gripping emerging foreign exchange and equity markets this week has exposed an Asia that, despite amassing huge currency reserves and devising policies to insulate it from the kind of fund flight that triggered the Asian financial crisis in 1997 and 1998, has once again become susceptible to the rapid reversal of capital inflows.
"Some of the tailwinds that Asia has enjoyed over the past five to 10 years are coming to an end - and in some cases are turning into headwinds," said Andrew Swan, a portfolio manager at Blackrock in Hong Kong who oversees roughly $2.2 billion in Asian stocks.
Economists, bankers and investors say they caught a glimpse of Asia's possible future in June, when regional markets convulsed at a suggestion by Federal Reserve chairman Ben Bernanke that the central bank of the world's largest economy might start scaling back quantitative easing, or QE.
Those concerns have returned with a vengeance this week to batter markets in India and Indonesia.
Having failed to dismantle politically and socially knotty obstacles to growth, Asia has instead relied on low interest rates and massive borrowing to keep its economies expanding, particularly since the 2008/09 global financial crisis that prompted the Fed to start aggressively buying bonds.
As a result, if and when QE finally ends, Asia could find its growth targets much more costly to achieve.
"Policymakers have been so worried about trying to keep growth going, they've eased all the kind of stimulus levers but have done that at the expense of structural reforms," said Rob Subbaraman, chief Asia economist at Nomura in Singapore. "That's coming back to bite them.
Where it bites in a region as diverse as Asia varies widely.
But whether it's immigration and labour laws in Japan, the dominance of state enterprises in China or hurdles to foreign investment in India, each nation faces its own third rail of reform - one that stands to revive productivity and boost potential growth if resolved, but which has proved too politically fraught to undertake.
AVOIDING PAINFUL REFORMS
Asia was able to avoid many such painful reforms after the crisis of the late 1990s when the global technology boom boosted demand for its exports. Then, when the global financial crisis hit, strong domestic finances helped insulate the region.
Growth rates remain enviably high: the IMF projects that developing Asia's economy will still expand by 7 percent this year.
But exports have not recovered as smartly in the wake of the 2008/09 crisis. With Europe barely out of recession and the United States recovering only grudgingly, growth in exports from seven of Asia's biggest exporters - Japan, China, South Korea, Taiwan, Thailand, Hong Kong and Singapore - ground to a halt in the second quarter.
Many Asian nations have instead tapped a rising tide of cheap global funds to keep economic activity humming.
With the Fed keeping its rates at virtually zero to resuscitate U.S. growth, global investors scoured the globe for higher returns, helping push down Asia's borrowing costs.
In April 2012, Indonesia's government borrowed money for 10 years for a record low 3.375 percent, only about 1.8 percentage points more than the U.S. government was paying. The same month, Korean electronics giant Samsung Electronics was able to borrow $1 billion at 1.75 percent.
Such massive inflows of credit helped some countries keep growth relatively strong, but Asia's private sector debt soared to 165 percent of GDP in 2012, according to Nomura, higher than the 127 percent level prior to Asia's financial crisis.
Borrowing by households and companies in South Korea, Hong Kong and China, is now double the size of each country's respective economic output.
"Asia has levered up like the rest of the world at the same time as earnings were coming down. That's the bad part," said Joel Kim, the Singapore-based head of Asian fixed-income at U.S. investment management company BlackRock.
The concern among economists is that all that borrowing has not gone into profitable investments that boost productivity and growth.
Take China. It responded to the global financial crisis by flooding its economy with cheap credit. When the Fed cranked up money printing, Beijing had little choice but to keep borrowing costs low or allow its currency to rise rapidly.
The amount of credit in China's economy almost doubled between 2008 and last year, and investment climbed to 46 percent of GDP. Almost half of that money went into either property or infrastructure, according to Nomura.
China's empty buildings and ghost cities are testimony to over-investment in property and construction, but overcapacity also plagues heavy industries such as cement, steel and coal.
Producer prices in China have consequently been falling for 16 months as growth slows. Now China appears to be gearing up for some form of bailout of its lenders.
At the other end of the spectrum are countries such as Indonesia and India, which didn't binge on credit, but instead failed to take advantage of cheap money to boost the capacity of their economies to create jobs and reduce their dependence on imported fuel and manufactured goods.
India thus suffers from an under-investment problem. World Bank data shows that growth in India's investment in equipment and other physical assets, other than land, has been slowing since 2007.
One sign of how little investment is accomplishing is that the region's current accounts, the sum of an economy's trade balance and its investment income, are steadily evaporating. The overall current account surplus in Asia's 11 largest economies dropped from 6.3 percent of aggregate GDP in 2007 to 1.6 percent last year, according to Nomura's calculations. Japan's once formidable surplus has dropped almost to zero and India, Indonesia and Hong Kong have all slipped into deficit.
Some economists see in these shrinking surpluses a welcome shift away from over-reliance on exports towards consumption-driven growth - precisely the sort of rebalancing that global policymakers were clamouring for after the last crisis.
"In many countries that have previously relied mainly on exports to advanced countries there is now greater role for domestic demand," said Anoop Singh, head of the International Monetary Fund's Asia-Pacific department in Washington.
But consumption's contribution to GDP has not risen significantly and private-sector economists point to a worrisome decline in the return on Asia's investment.
Asia, in short, is getting less bang for its buck. According to HSBC, labour productivity growth in Asia, excluding Japan, has been slipping since 2007 along with economic growth rates.
Pricier global capital poses a problem for a region still financing its own development. The Asian Development Bank estimates the region needs to spend $8.3 trillion, equivalent to China's GDP, over the current decade to maintain and expand its electricity, telecommunications, transport and water supply.
"The timetable set out by the Fed on scaling back QE comes at a particularly bad time since the largest emerging markets - China, India, Indonesia - are all trying to push through much-needed and significant structural reforms," said David Gaud, senior portfolio manager of Asian equities at Edmond de Rothschild Asset Management in Hong Kong.
Global funds may not just stop pouring in - since February, investors have been pulling money out of Asia-dedicated funds. While foreign investors are still buying stocks in Japan, they have sold at least $10 billion worth of stocks in the rest of Asia in the past 13 weeks, according to Nomura.
That stands to squeeze companies that borrowed big when rates were falling on the prospect of rising growth rates.
"Our debts have increased while our foreign operations have not performed as projected, so we need to be cautious on spending," said Adirek Sripratak, chief executive of Thailand's Charoen Pokphand Foods, which doubled its long-term debt last year.
It also stands to batter currencies, as India and Indonesia are finding out this week. Asia's 53 percent rise in reserves since the global crisis looks less comforting when compared with the 125 percent increase the Bank for International Settlements has measured in Asia's short-term external debt since 2008. That means that while in 2008 Asia had $4.60 for every dollar it owed foreigners over the next two years, it now has only $3.15.
That's where structural reforms come in.
"The key purpose is to remove structural impediments to growth - that's what structural reform does," said Wai Ho Leong, former Singapore trade official and senior regional economist at Barclays in Singapore. "When the winds start picking up, you want to make sure the sails are big enough."