Hats off to officials in Seoul.

South Korea’s ability to expand at the fastest pace in almost six years is some of the best news Asia has had in a long while. It’s a sign that even with the $14 trillion U.S. economy in chaos, Asia is beating the odds and holding its own.
For now, at least. The region can’t be complacent for two reasons. One, increased spending and low interest rates are fine for the moment, yet they don’t replace a return of global demand. Two, loose policies may be doing more to fuel bubbles that merely provide the illusion of economic recovery, leaving Asia even more vulnerable to further problems in markets.
The 2.3 percent growth South Korea generated in the second quarter dovetails with optimism that East Asia’s rebound from the global crisis may be “V-shaped,” not U-shaped or W-shaped. The Asian Development Bank said just that in a report last week. It recommended that central bankers retain expansionary monetary policies even as risks to recovery dissipate.
That’s just what worries me, and China is a case in point.
Mark Matthews, Asia-Pacific strategist at Fox-Pitt Kelton in Hong Kong, isn’t exaggerating when he calls China “a bubble in the making.” His concern is that massive stimulus efforts are “being misallocated into equities, something the authorities cannot be happy to see.”

SURGING STOCKS

Headlines about China’s booming equity markets may score points with investors and consumers. It’s not a long-term cure-all for what ails Asia’s second-biggest economy. Surging stocks don’t get China any closer to reducing its reliance on exports. They’re also largely supported by government largess funded by debt — something that can’t be sustained over time.
It’s an Asia-wide phenomenon. Signs of life in the region’s economies are compliments of massive stimulus efforts that will become less potent as time goes. That will put the onus on central banks to trim interest rates to support markets. Again, this is a short-term fix, not a long-term solution. It will only lead to new asset bubbles that look like economic growth.
In a sense, optimism about a V-shaped recovery in Asia is becoming a bubble all its own.
China State Construction Engineering Corp., for example, owes Beijing a debt of gratitude. The government’s stimulus efforts paved the way for State Construction to raise $7.3 billion in Shanghai last week. It was the world’s biggest initial public offering in 16 months, and its success is among the reasons Asian equities had a great week.
Spending surge
In South Korea, Samsung Electronics Co. has joined exporters Hyundai Motor Co. and LG Electronics Inc. in reporting that profit surged last quarter, helped by demand fed by
$2.2 trillion in stimulus worldwide and a weaker currency. The question is, are investors responding to a real rebound in Asian growth or the illusion of recovery fueled by public spending?
The MSCI Asia Pacific Index has rallied 53 percent from a five-year low March 9 amid optimism that governments around the world will revive the global economy. What investors are missing is that once the high from those actions wears off, there may not be enough largess in the pipeline to offer stimulus-addicted investors another fix.
That’s not to detract from South Korea’s success in riding out the global recession. Eight months ago, traders were wondering if South Korea’s debt exposure would have Asia’s fourth-biggest economy going the way of Iceland. Today, the speculation is over whether the Bank of Korea will be among the first major Asian central banks to begin raising interest rates.

U.S. CONSUMER BASE

Yet Asia’s economies are still too much about the U.S. consumer. As long as U.S. unemployment keeps climbing, Asia’s outlook will remain uncertain. Even a China bull like Jim Rogers, chairman of Rogers Holdings in Singapore, will admit that it’s “impossible” for Asian economies to decouple from the U.S. and Europe anytime soon given their relative sizes.
That really makes you wonder about the speed with which markets are advancing. Stocks in Shanghai are up 85 percent this year. They’re up 83 percent in Jakarta, 61 percent in Mumbai, 51 percent in Taiwan, 43 percent in Singapore, 41 percent in Manila, 40 percent in Bangkok, 39 percent in Hong Kong and 35 percent in Seoul.
Such moves have many wondering why stocks in Tokyo appear to be lagging. Perhaps the 7.4 percent rise in the Nikkei 225 Stock Average this year is more reflective of Asian reality than the region’s other bourses.
The need to retool economies away from exports toward domestic demand has never been greater. The Dow Jones Industrial Average being above 9,000 doesn’t alter the basic calculus. Confidence among U.S. consumers fell in July for the first time in five months as mounting unemployment and stagnant wages shook households. That’s what matters to Asia, not buoyant stocks.
The global crisis will eventually end and Asians will return to the task of upgrading economies and raising living standards. We’re not there yet, and hopes that markets can continue heading for the stratosphere won’t be supported by realities on the ground.
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.