Asian stock markets have suffered more than those in Europe and the US as investors have retreated amidst the growing uncertainty, fulfilling general expectations of greater vulnerability.
This time last year the talk was of decoupling, expressing the hope that Asian economies and stock markets would continue to perform well despite the expected slowdown in Europe and the US. Much of this hope was predicated on the continued strength of the Chinese economy and the increasing economic interdependence among Asian countries. Most countries in the region have developed strong economic ties with China since the Asian economic crisis in the 1990s.
The promise of growth uncorrelated with the west has been achieved to some extent. China may not be forecast to grow at the previously predicted turbo-charged 12 or 13 per cent in the coming 12 months, but there is a general expectation that it will achieve a respectable 8-9 per cent.
Fearing the slowdown in the US and Europe would significantly damage growth as exports decline further, the Chinese authorities have taken action since the closing ceremony of the Olympics, not least prompted by the extraordinary events in the US in September.
At its low, China's domestic currency "A" share market had fallen almost 65 per cent for the year, concurrent with a sharp drop in trading volumes. The stock market crash had begun to threaten consumer confidence. As China seeks to shift emphasis from the export sector to consumption, any fall in consumer confidence would most certainly impede overall growth.
Hence the authorities this month announced a reduction in stamp duty on share trading, providing reassurance the government would not allow the market to fall further and without policy intervention. This was co-ordinated with China's sovereign wealth fund, the CIC, indicating it was active in the stock market, buying stakes in the country's three leading banks.
There is now also speculation the government will establish a stabilisation fund as various government agencies are thought to have been active in the market at the same time. The central bank also this month announced the first interest rate cut in six years together with a reduction in banks' reserve requirements.
Previously, successive increases in these requirements had been aimed at soaking up liquidity to deter speculation on the Chinese renminbi's appreciation.
Fiscal measures have also been taken, with higher VAT rebates in certain sectors most hit by falling trade volumes and weaker margins, together with greater infrastructure spending.
These measures have been taken as foreign interest in the "A" share market appears to have improved. A year ago it was either impossible or expensive to gain exposure to the "A" share market directly. Official quota that had been granted to various investment banks had been available to investors through various means and at a premium. When the Chinese stock market was surging in the third quarter of last year it was harvest time for the brokers and investment banks engaged in this market.
As a result of the sell-off this year, foreign interest in China's stock market had waned and by the middle of the year, quota could be easily and inexpensively rented. While domestic investors remained shy of the Chinese stock market through the summer, it seems foreigners have been regaining their appetite. The cost of accessing quota has been increasing as it becomes scarce, and exchange traded funds investing in China's A-shares are now trading at larger premiums. This increasing interest may prove lucky for institutions being awarded quota as part of China's current programme to increase the number of qualified foreign institutional investors (QFII).
Ten years ago, at the height of the Asian financial crisis, governments and companies in Asia were paying the price of excessive borrowing. Economic growth suffered and confidence in the banking sector was severely damaged.
Paradoxically, as the region's investors and authorities examine the consequences of events in the US, governments, companies and individuals are not encumbered with significant debt. Consequently economic fundamentals in Asia remain sound. Earnings estimates in Asia have been progressively reduced through the year and are now reaching a plateau.
It is hoped that improving margins as a result of easing oil and raw material prices will offset falling volumes as the global economy slows. Earlier in the year, the situation looked a lot worse when higher commodity prices threatened to fuel inflation and damage earnings prospects further.
Asia's stock markets may not be able to stage a sustained recovery until the global situation becomes more stable, but the region is well positioned to take full advantage when the latest crisis is overcome. Asian investors' renowned appetite for volatility is likely to be tested to the full.