Asia cheers bailout but frets about rising U.S. debt

McClatchy NewspapersSeptember 22, 2008 

BEIJING — Investors in Asia on Monday cheered the U.S. bailout plan for Wall Street, voicing hopes that it would stabilize the American economy even as they fretted that spending on the massive bailout would trigger a rise in global inflation.

China voiced reassurance that the U.S. plan would contain the crisis, while South Korea and Japan pondered whether it would provide protection for banks that are holding distressed American mortgage debt.

As stock markets rallied around East Asia, analysts worry that Washington will print more money to finance the bailout, an action that could weaken the U.S. dollar, lift commodity prices and fan inflationary pressures.

President Bush called Chinese leader Hu Jintao early Monday local time to explain the $700 billion rescue plan of the U.S. financial sector, which is shaping up as possibly the largest bailout of private industry in American history. The state news agency, Xinhua, said Bush told Hu that "his government was well aware of the scope of the problem, and had taken and would continue to take necessary measures to stabilize the domestic and world financial markets."

Some experts took a wait-and-see stance.

"The news announced by Washington is good news, but the securities market in China still needs time to see if America can resolve the crisis," said He Qiang, a securities expert at the Central University of Finance and Economics and a member of a government advisory group.

Shanghai's Composite Index shot up 7.8 percent in trading Monday, after Friday's 9.4 percent leap, but the rally appeared more linked to domestic measures to stimulate the market than the news out of the United States.

"The reaction to U.S. problems is clouded by China's reactions to its own problems," said Paul Cavey, the Hong Kong-based head of China economics for Macquarie Securities.

Cavey said China was far more worried about the U.S. takeover two weeks ago of mortgage giants Fannie Mae and Freddie Mac because of its huge holdings of their bonds. China doesn't publicly detail the composition of its American holdings, but they're enormous.

"China has at least a trillion dollars in U.S. dollar assets, most of them in fixed income," Cavey said.

China's exposure to the bonds of Lehman Brothers — the onetime No. 5 U.S. investment bank, which collapsed last week — are relatively small-scale, totaling about $640 million, largely in the hands of commercial banks.

Elsewhere around the region, Japan's Nikkei 225 index rose 1.4 percent, Hong Kong's Hang Seng Index rose 1.6 percent, Australia's main index climbed 4.5 percent and South Korea's Kospi edged up 0.3 percent.

South Korea's central bank said it expected local markets to stabilize gradually after the U.S. rescue plan.

The Korea Times, an English-language daily newspaper, charged that Washington will print more money or issue more Treasury bonds to finance the bailout, a move that "will export pain to the rest of the world" through rising commodity prices.

In Japan, economists urged U.S. legislators to deal with the toxic bank assets quickly.

"The first key hurdle is for Congress to reach a speedy decision on the various points of contention in the package, such as the extremely wide discretion given to the Treasury, and questions of financial institution responsibility," said a Merrill Lynch research memo written by economists Masayuki Kichikawa and Takuji Okubo.

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McClatchy Newspapers 2008

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