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Why are markets down on East Asia?

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Looking at the latest lackluster numbers from East Asia's major equity markets, I kept thinking of my American and European friends' unbridled enthusiasm about the region's future.

It also reminded me of an apocryphal one-liner attributed to the former French President General de Gaulle, who is reported to have said that "Brazil is the country of the future – and it always will be."

Misplaced transposition to East Asia? I sincerely hope so.

But here is what the markets' collective wisdom says.

Whether one looks at stock price indices in East Asia's three largest economies – China, Japan and South Korea – over the last twelve months, or since the beginning of this year, the negative or flat returns don't suggest faith in their future promise over the relevant investment horizons. In fact, in the cases of China and Japan market valuations of what these economies are offering have steadily deteriorated since the end of last year.

Read MoreChina, Japan key threats to Asia's economic outlook: IMF

Are the markets wrong? Again, I hope so, but please read on.

China is eternally misunderstood. That is partly because its appeal to patience and long-term investment strategies is an anachronism in financial markets of "flash boys" and high-speed traders.

Markets also seem genuinely confused by China leaders' publicly voiced anxieties. At times the official Beijing sounds overwhelmed by the task of directing the country's sweeping structural reforms while fine-tuning domestic demand to deliver an economic growth of 7.5-8 percent. And all that has to happen in the uncharted territory ruled by merciless forces of demand and supply.

Read MoreCramer blesses'this' China spec stock

That is the conceptual framework the Chinese are trying to work with. The ultimate arbiter of their success will be their self-imposed growth target, which is roughly reflecting the physical limits of their economy.

Playing China from the Fragrant Harbor

Markets are showing quirks of their own. Their strange fixations on Chinese numbers being tiny fractions above or below their betting estimates often look like mean "gotchas." And so do markets' futile attempts to uncover something that Beijing's authorities presumably don't know, or something they suspect them of trying to sweep under the carpet.

Please, let's be serious. Chinese authorities have superior information on their economy, they know what their problems are, and their track record shows that they know how to fix them. Some foreign analysts' arrogant and gratuitous coaching gives Beijing's policy makers a good laugh.

Does that mean that China's economic policies should not be questioned? Not at all. But as a long-time observer of China's economy, and an occasional lecturer to the Chinese financial community, I have always been impressed by the transparency and readiness to openly acknowledge problems they were dealing with.

Read MoreChina wealth gap may be far worse than official estimates

Now, here is a scoop. While Chinese stock prices (SSEA index) have declined nearly 7 percent over the last twelve months, a European stock-picker and an old China hand based in Hong Kong has recently reported that, during the same period, his Chinese equity fund marked double-digit positive returns. And that is all based on Chinese companies quoted on the Hong Kong Stock Exchange. (Disclosure: I have no investments in that fund or in any other East Asian assets.)

There is no scoop about Japan. The Nikkei 225 is down 13.5 percent since the beginning of this year. That index also marked a 1.4 percent downtick during last Friday's trading to greet the stellar first quarter growth numbers.

That was a pretty brutal vote of no confidence in Tokyo's assurances that massive monetary stimuli (and perhaps also public works) will be holding the economy on an even keel after the frenzy of anticipatory buying over the last few months to beat the sales tax hike.

Read MoreAre Japan stocks set to slide further?

The Japanese business community also delivered a one-two punch of its own: According to the Bank of Japan's first quarter business survey, investment spending is expected to decline 4.2 percent during this fiscal year ending in March 2015. That is how much confidence the captains of corporate Japan have in current economic policies to keep their order books up in the months to come.

Business smarts, no martial arts

Is it possible that this dismal number on business outlook is entirely missing an apparently strong revival of Japan's own industrial-military complex to fight China – Tokyo's most important trading partner? Media headlines are proudly showing off the swelling ranks of military recruits getting ready for the China challenge, sophisticated weapon systems produced by domestic manufacturers and the government's determination to get rid of constitutional obstacles to the projection of Japan's military power. Interestingly, most of that is being presented as an attempt by Japan to be a truly useful ally in case of a Sino-American military confrontation.

Read MoreWill doom follow Japan's first quarter boom?

Paradoxically, though, there is at the same time an endless stream of Japan's business and diplomatic emissaries to China, seeking peace and dialog about territorial disputes and strategic positions. But neither country wants to compromise, making it all look like dialog of the deaf. Or, more charitably, like buying time in the race to a seemingly inevitable clash, setting the stage for an intractable U.S.-China nuclear standoff.

I fervently wish this were all far-fetched ruminations. Sadly, they are not.

Here is a Pentagon-staged event to illustrate the point. During their press conference last Thursday (May 15, 2014), the U.S. Joint Chiefs Chairman General Martin Dempsey and his Chinese counterpart General Fang Fenghui said they held "refreshingly frank" and "constructive" talks.

What "frank" in Chinese means is this: "We don't make trouble but we are not afraid of trouble," and "in matters of territory, our attitude is firm – we don't give an inch."

And here is what "frank" means in Pentagon-speak: "We have to acknowledge that there are territorial disputes," and "what exactly is the status quo and who is seeking to change it." That is a clear dig at China, and an implicit warning that the U.S. opposes China's claims in the South China Sea.

Investment thoughts

The outlook for East Asia's growth dynamics is not good.

Read MoreWhy China's economy is still lagging Japan

China wants to stabilize the economy while changing its composition and structure in accordance with price signals from an increasingly market-driven activity.

Japan's household consumption and domestic investments don't look good as a result of consumers' eroding purchasing power. With apparently diminishing returns from monetary easing, Tokyo will seek the way out through stronger exports.

Dangerous confrontations are also undermining the regional economy. As the Sino-Japanese standoff continues, additional security threats are raised by China's clashes with Vietnam and the Philippines. The economic fallout is obvious: Japan's exports to China are slowing and disputes with Beijing are damaging these two small East Asian economies.

Read MoreJapan grows atfastest pace in nearly 3 years

The U.S. is also being drawn in. Washington has to honor its treaty obligations to Japan and its security commitments to East Asian friends and allies; it is also determined to guaranty the safety and openness of sea and air traffic in Asia-Pacific.

Dropping a buck in this maelstrom is not for the faint of heart.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

Follow the author on Twitter @msiglobal9

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