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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

NOVEMBER 26, 1999 VOL. 25 NO. 47

Who's Hot, Who's Not
An outspoken strategist on Asia's prospects
Few investment strategists are as blunt as David Roche. In an industry where many research analysts tread a careful line to avoid antagonizing potential clients, the former global strategist for U.S. investment bank Morgan Stanley is not afraid to speak his mind. Roche now heads London-based investment advisory firm Independent Strategy. He spoke with Asiaweek's Assif Shameen.

What do you make of the China-U.S. agreement on Beijing joining the World Trade Organization?
Any deal that gets China into the global scheme has got to be viewed as positive. But when it comes to making money out of these things, it is a lot more ambiguous. For a start, the implementation could take forever. [Membership in the WTO] is in the main highly deflationary for China, because it will have to open its markets in a lot of different sectors to foreign companies. I don't think it will start an immediate wave of new foreign direct investments. Most foreign investors have not made much in China in the past few years and this deal isn't going to help them make money quickly. This isn't very positive for the renminbi.

    ALSO IN ASIAWEEK
War
Will Globe upset Philippine phone leader PLDT?

Tycoon
Li Ka-shing flirts with another windfall

Interview
Outgoing chief Camdessus on Asia - the expanded online interview

Investing
David Roche tells it like it is

  RELATED STORIES
TIME
Viewpoint: Running in Place
David Roche says Japan's upturn masks serious stagnation (08/09/99)

Malaysia: Lessons Never Learned
It's only a matter of time before Malaysia's economic boom goes bust (11/01/99)

CNN
Transcript:
Roche: 'Best of the Economic Recovery is Over' in Japan (11/05/99)

China has signed a piece of political paper that raises the profile not just of President Jiang Zemin, but also reformers like Zhu Rongji. But that doesn't mean it will allow this piece of paper to let problems like unemployment deteriorate further.

The Hong Kong market is up on the WTO news.
It's not our favorite market. Leaving aside the Internet craze, where I wouldn't put in a penny, what do you really have in Hong Kong? Mainly the property companies, which have yet to learn that the world has changed. Sure there's been some excitement with Mickey Mouse and the launch of the Tracker Fund, but I don't think Hong Kong has much going for it right now. Frankly, at these ridiculous levels, I would rather short the Hang Seng Index.

Let's move on to post-election Indonesia. Is it the next market to watch?
We have recently reversed our long-standing recommendation on the rupiah. We made enormous amounts of money on our long positions when the rupiah was at 9,000 to the dollar. We don't believe there is too much upside from here on because the market has priced in all the good news. That is not to say that the economic and political future won't get better. The country is surrounded by more risk than any other government in Asia right now. But it also represents enormous opportunity. In Indonesia, like in Eastern Europe, you have the opportunity to throw out an old and corrupt establishment. For foreigners, Indonesian assets are still fundamentally cheap. Nobody wants to see this important country flare up like Kosovo. The money is there - provided the government makes the right moves.

Is the government on track?
There are signs that the new government isn't doing the right things. President Abdurrahman Wahid is running a popular-front-style coalition. That is not the best way to make hard decisions. In the end, only foreign money can balance the Indonesian budget, allow growth to return, build up the banking system and stabilize the rupiah. My own view is that there is now a 60% probability of Indonesia getting it right and 40% of getting it wrong.

What about Malaysia, which has just called snap polls?
If you pump in money and convert the current-account surplus into cash and have massive fiscal-spending programs [to help win elections], then clearly you are going to produce a recovery and rising asset prices. The problem is that, long term, this is extremely unhealthy because of price distortions. Big budgets and central banks pumping money into the system do not produce sustainable productivity that fosters long-term growth. Malaysia has the highest bank-lending-to-GDP ratio in Asia and the highest loan-to-deposit ratio if the figure were reported on the same basis as elsewhere. It also has the highest proportion of real-estate lending. Banking problems are completely misreported there. They took out a small kernel - only about 30% to 40% of the total bad debts - and said this is the total problem.

You haven't been very positive on Thailand.
The problem there has been the banks' bad debts. In Korea, [asset management company] KAMCO went in and bought all the bad debts at a huge discount or at realistic valuations, forcing the banks to write off the difference. That hasn't happened in the big family-owned banks in Thailand. There are other structural problems. The legal system is one, though it is being addressed. The education system is another.

And South Korea?
Right from the start, they were serious about reforms. There had to be a shootout between the legal power - the government - and the economic powers - the chaebol. Luckily, Hyundai got the message and started to change. Daewoo didn't or couldn't. The won has a lot of upside. But the economy is going at nearly 10%. So you've got to cool it. That means putting up interest rates and the cost of capital, and that actually might mean a few more chaebol collapses.

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