According to Credit Suisse, despite the recent market volatility, Asian currencies and equities are generally still up or flat on the year, and credit is not widely held among Asian consumers. The exposure of regional banks to CDO/subprime debt appears limited, but the sell-off in credit markets is likely to have created losses where exposure to foreign currency corporate bonds is high.

Dong Tao, Credit Suisse's Chief Regional Economist for Asia ex-Japan commented: "The malaise in the U.S. housing sector is expected to trigger a global slowdown, and Asia's exports will be affected. But, in our view, economic fundamentals in Asia ex-Japan remain solid and regional markets should weather the growth downcycle."

Average weighted growth for Asia ex-Japan was revised down to 8.4% for 2007 from the previous 8.6% in Credit Suisse's newly published Emerging Markets Quarterly report.

In China, the outlook for inflation continues to deteriorate, with CPI hitting 6.5% in August, the highest level since December 1996. Rising food prices were the main cause, but non-food inflation is a bigger concern as expectations could fuel wage and rent hikes and service price increases. Credit Suisse forecast that non-food inflation, currently standing at 1%, will reach 2% by the end of 2007, and jump to 4% by the end of 2008. The bank lowered China's GDP growth forecast in 2007 to 11% from the previous 11.5%. Besides slower exports, the real economy in China is expected to moderate in the second half of 2007, Tao announced.

Inflation is also a concern for Hong Kong, where strong economic momentum and robust employment conditions have fueled upward inflationary pressure. Coupled with rising wages and a strong equity market, these factors have caused an acceleration in consumption growth and gross capital formation. According to Tao, the recent spikes in the HIBOR may push up effective mortgage rates, but he remained optimistic about asset appreciation in Hong Kong.

In Southeast Asia, Vietnam is again expected to show the strongest growth at a forecast 9.2% for 2008, versus a forecast 8.8% this year. The common theme of inflation is present, driven by higher food prices, rising wages and asset growth. CPI inflation is expected to trend at 9% for the rest of the year, putting it at a three-year high. The bank expects central bank intervention before the year-end, with the discount rate anticipated to rise by 1% to 5.5%. Another 1% hike is possible in early 2008, but the probability could be reduced if a global liquidity crunch affects capital inflows, Credit Suisse concluded.