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Asia Rethinks American Investments Amid Market Upheaval

Tremors from Wall Street are rattling Asian confidence, leading many investors to question the wisdom of being invested in the United States to the tune of trillions of dollars.

Asian investors were starting to show hesitation even before the financial earthquake of the last week. Now, a wariness toward the United States is setting in that is unprecedented in recent memory, reaching from central banks to industrial corporations, from hedge funds to the individuals who lined up here to withdraw money from the American International Group on Wednesday.

Outline of Asia, Map of Asia
CNBC.com
Outline of Asia, Map of Asia

Asia’s savings have, in essence, bankrolled American spending for decades, and an Asian loss of confidence in American financial institutions and assets would have dire consequences for both the United States government and American taxpayers.

The potential for panic is stoked by Asian news organizations, which tend to focus more on business and economics than on politics, which can be touchy here. Their coverage has been obsessive and unrelentingly negative about the bankruptcy of Lehman Brothers, Merrill Lynch’s rush to find a buyer and the turmoil at A.I.G.

The nonstop deluge of bad publicity for American investments seems to be seeping into the consciousnesses of the rich and middle class across Asia.

“I do not believe in U.S. financial institutions anymore; I don’t think any U.S. bank is safe anymore,” said Wang Xiao-ning, a Hong Kong homemaker. Even after the Federal Reserve had taken control of A.I.G. , she waited in line with dozens of other anxious policyholders at one of the insurer’s customer service centers for the chance to close her investment account.

The asset management operations of American banks have steered many Asian investors into American securities for years. But Thomas Lam, the senior treasury economist at United Overseas Bank in Singapore, said many of these investors had not fully understood what they were buying. They became more curious and more concerned when, for example, Fannie Mae and Freddie Mac were placed in conservatorship.

“All these top executives, Indonesians and others, started asking, ‘What do they really do?’ ” Mr. Lam said. “They bought because the next company did.”

Some experts say that with Asia’s phenomenal economic growth, savings are piling up so quickly that those funds will inevitably start flowing again to the United States at a fast clip. (The Chinese economy grew 23 percent in dollar terms last year.)

“The interest for the moment is depressed, but the trend is, we have a lot of savings in Asia and this is a bargain time” for assets in the United States, said Paul Tang, the chief economist at the Bank of East Asia in Hong Kong.

For now, though, Asian interest in American assets is wilting, a trend that seems to have started over the summer.

Little-noticed data released by the Treasury Department on Tuesday showed that a sharp shift in international capital movements began in July. Private investors pulled a net $92.9 billion out of the United States, after putting $46.8 billion into American securities in June.

Many investors in Asia think that Asian economies will bounce back from the current global economic downturn faster than the American economy, said Henry Lee, the managing director of the Hendale Group, a well-known Hong Kong investment advisory firm. So they are putting their money in Asian companies.

“When the dust settles, I think Asia will come out ahead of the U.S.,” he said.

Central banks, mainly Asian, did continue buying American securities in July. But they did so at a slower pace than usual. They made net purchases of $18.2 billion, compared with an average monthly purchase of $22.3 billion in the first half of this year, according to the latest Treasury data.

The central banks also changed the allocation of their purchases. They bought short-term Treasury bills while slowing their purchases of longer term Treasury bonds and American corporate bonds. And they abruptly switched from being large buyers of bonds from government-sponsored enterprises, like Fannie Mae and Freddie Mac, to becoming net sellers — one of many factors that contributed to the Bush administration’s decision to put Fannie Mae and Freddie Mac into conservatorship.

Advice For Investors

If cash is king during the current global financial crisis, then Asian governments and financial institutions are emperors. China’s central bank alone has $1.8 trillion in foreign reserves. Those reserves grew $280.6 billion in the first half of this year — a pace of $64 million an hour.

Americans have a huge stake in what China does with that money. Foreign cash coming into the United States to buy American assets holds down interest rates by making plenty of money available for the federal government to borrow to cover its budget deficit, and for consumers to borrow so that they can afford imported cars, DVD players and other goods.

Commerce Department data released on Wednesday showed that the nation’s current-account deficit, the broadest measure of trade in goods and services, had a deficit of $183.1 billion in the second quarter.

What does China gain?

Changing Asian sentiments have not yet eroded the value of the dollar — although market reaction to the A.I.G. bailout seemed to be doing that Wednesday. Asian skittishness has coincided with heavy selling by Americans of their holdings of stocks and bonds in foreign markets.

“It’s almost a case of everyone bringing money back home,” Americans and Asians, said Ben Simpfendorfer, an economist in the Hong Kong office of Royal Bank of Scotland.

But the withdrawal of money from the United States in July was the largest since August of last year, when the subprime housing crisis and resulting credit squeeze first started to seize global markets. Back then, private investors pulled out $140 billion from the United States and central banks withdrew $22 billion.

Mr. Simpfendorfer and other economists cautioned that if the July pattern endured, it could quickly become a problem for the United States. Surprisingly, so far, China’s central bank has actually emerged as a big winner from the American turmoil. Its bond holdings of government-sponsored enterprises, estimated by credit rating agencies at $340 billion, rose in value by billions of dollars in a single day when the Bush administration made explicit the government guarantee of Fannie Mae and Freddie Mac bonds, causing their interest rate spreads compared with Treasury bonds to narrow by 5 to 35 basis points within hours.

The exact amount of China’s gain cannot be calculated without knowing the maturity and composition of its holdings of these bonds, which Chinese officials have not released, according to specialists in fixed-income securities.

Beijing officials regulate international capital flows so tightly that the central bank dominates China’s overseas investments. It holds more than 90 percent of all Chinese-owned bonds from Fannie Mae and Freddie Mac, for example.

“The average person on the street in China has no channel to invest in the U.S.,” said Jing Ulrich, the chairwoman of China equities at JPMorgan.

But most private investors elsewhere in the region have considerably more freedom to park their assets in whatever country they please, Mr. Lee, of the Hendale Group, said, and they are very interested these days in assets in Asia.

Hilda Wang contributed reporting.


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