The hope is that the Japanese government's economic stimulus plans will work and the Chinese government will resist the temptation to devalue the yuan ren minbi. The fear is that precisely opposite will happen.
Although the Chinese government still denies that it has any intention to devalue, and the Japanese government insists that it is finally grasping the nettle of fiscal reform and is prepared to stump up enough public money to reflate the economy, big investors are resolutely sceptical.
This scepticism sent Hong Kong's blue-chip Hang Seng Index tumbling 4.9 per cent yesterday to its lowest point in more than three years. Closing at 7,979 points, the index has lost more than half its value since last summer's high.
In Taiwan, the country in the region whose economy has been hit least badly by the Asian financial crisis, the stock market fell more than 3 per cent to a seven-year low and the New Taiwan dollar tumbled to its lowest level since March 1987.
The Thai stockmarket, no slouch when it comes to testing new lows, plunged more than 5 per cent to hit a 10-year low. Piling on the agony the credit- rating agency Standard and Poors issued a warning that some 35 per cent of all Thai bank loans were problematic.
Elsewhere in the region, stocks and currencies marched in step in a downwards direction as the Japanese yen proved that Tuesday's modest recovery was no more than a aberration when it headed back towards an exchange rate of 141 yen to the US dollar.
It is hard to be sure what spurred the carnage. The most common explanation is that this bout of contagion spread from Hong Kong, where there was alarm about a statement by Dai Xianglong, China's central bank governor. He is reported to have told a private meeting that "the depreciation of the Japanese yen is having a very negative impact on Chinese imports and exports and the utilisation of foreign capital".
Combined with figures showing exports slowing to a level of 12 per cent growth in the first four months of the year from 21 per cent last year, and others showing output expanding only 7.9 per cent in the first five months of the year, well below the 10.5 per cent target, this led investors to conclude that the Chinese leadership was ready to break its pledge to maintain the value of its currency.
This, in turn, focused attention on the possibility of a break in the Hong Kong dollar peg with the US dollar, which would be hard to sustain in the face of a Chinese devaluation. It only needed a hint of this kind to send Hong Kong interest rates soaring. Overnight, interbank rates reached up to 8 per cent compared with Tuesday's close at 6 per cent.
The stock market has no hope of staying firm in the face of interest- rate movements of this order, although they were far less alarming than the treble digit overnight rates seen at the end of last year when the Hong Kong dollar was under speculative attack.
China, meanwhile, is attempting a strategy of reflating the domestic economy to avoid devaluation. Interest rates have been lowered and banks' borrowing ratios relaxed.
But with rising levels of unemployment, the financial sector in a shambolic state and the government unable to come to grips with reform of the lumbering state-owned industries, domestic demand-led reflation is hardly an easy option.
The suspicion is that it simply will not work. Nevertheless, yesterday both Hong Kong and Chinese leaders rushed to deny rumours that a weak yen will prompt China to devalue.
Some analysts accept these denials. "The cheaper yen will not take away the market from Chinese exporters," said Chi Lo, from the Hongkong Bank China Service.
But this is not a majority view. As Alex Tang, research director at Core Pacific-Yamaichi International in Hong Kong put it: "Fund managers are not buying the story."
Nor are they buying the story of an impending Japanese economic recovery. A finance ministry survey released in Tokyo yesterday showed that in the first quarter of the year corporate profits were down 25 per cent while investment had declined 5.8 per cent and sales were off 6.8 per cent.
"It seems that fiscal 1997/98 was the worst for companies and that they could expect some pick up in 1998/99," said Mamoru Yamazaki, a senior economist at Paribas Capital Markets in Tokyo. "But it's questionable whether this will happen."
Speaking in Taipei yesterday, Premier Vincent Siew said that he thought the worst was over for most South-East Asian countries. But he added: "The situation in Japan is unclear. I fear it will take one or two years to improve."
Mr Siew was being quite restrained. Some analysts believe that the yen is heading down to as low as 180 yen to the US dollar and that the major stumbling block of weak domestic consumption cannot be shifted by current government policies.
This means that Japan, traditionally the main engine of Asian economic growth, is incapable of reviving other troubled Asian economies.
The most optimistic assessment yesterday came from Marcel Souza, of INVESCO Asset Management in Hong Kong, who said: "If policy measures being taken in Japan at the moment deliver economic growth 12 months down the road, we would be looking at a recovery in Asia." But this is hardly an affirmation of confidence, more like a timid prediction of things being not quite as black as they are painted.
The underlying fear in East Asia is that things will keep getting worse, not only because China and Japan can do little to help their neighbours, and may even damage them, but because the Asian economies are all awash with seriously devalued assets. And with falling credibility, many Asian governments are hardly in a position to lead their countries out of the crisis. Big-league investors are in no mood to help them out.
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