Asia is leading the emerging market race fed by expansionary domestic policies, fiscal and monetary, and the beginnings of a recovery in exports. The stabilisation of domestic prices and markets and the pursuit of good exchange and interest rate policies have aided. The recovery has also been helped by the return offoreign capital, both portfolio and direct investment. The growth prospects for 1999 are therefore strong. While, some jitters remain in Argentina, Latin America too has the potential to rebound solidly next year. There will thus be a more widespread participation in expansion from 2000 onwards. The recoveries, however, remain fragile and volatile. Asia Pacific has led in terms of a 60 per cent plus increase (70 per cent in $ terms) in its stock market indices over the past twelve months (v/s 33 per cent or 22 per cent in $ terms for emerging markets overall).

However, last month it lost 9 per cent of its overall gains. Investors are nervous about current valuations, about the continuation of structural reform policies necessary for growth and about the external environment.

Asia specifically is concerned to a great extent by what happens in the largest two economies in the region, China and Japan. Barely a month passes without China getting embroiled in one or more controversies. It has remainedunpredictable and impenetrable. Last month, there was escalation in tensions with Taiwan. Taipei abandoned its "one China policy" in July and China reacted strongly. Fortunately, only the financial markets showed some volatility and nothing actually happened. Further, Standard & Poor's lowered its long term sovereign China rating from BBB+ to BBB and its short term rating from A-2 to A-3 citing uncertain fiscal costs of reform. The country has propped up GDP growth through expansionary fiscal policies, mainly through the banking system. Domestic credit has expanded to 120% of GDP (up from 100 per cent two years ago).

The government believes that a let up in GDP growth to 6 per cent or below would exacerbate the financial strain on Chinese enterprises and deepen losses of state owned banks. It would increase urban employment beyond 10 per cent resulting in increased social tensions and higher costs of restructuring. In the past two years, neither the massive government. mandated infrastructure investmentnor the seven consecutive interest rate cuts have produced the impact of kicking the economy. The region fears that there are few macro-economic policy tools now left to test besides devaluating the Chinese Remnimbi. Only this may help boost money supply growth and domestic demand. A depreciation may prompt another vicious cycle of exchange rate adjustments in surrounding countries. The medium term outlook is for a gradual and moderate recovery. Individual country performance may be widely disparate.

The author is head of treasury marketing in a leading foreign bank. Views expressed are his own and not those of his bank