Asia's role as the world's growth engine is waning as economiesacross the region weaken and investors pull out billions ofdollars.

The Indian rupee fell to a record low yesterday, Thailand is inrecession, and Indonesia's widest current-account deficit pushedthe rupiah to the lowest level since 2009. Chinese banks' bad loansare rising, and economists forecast Malaysia will post its secondstraight quarter of sub-5 percent growth this week.

The clouds forming in Asia, as liquidity tightens and China'sslowdown curbs demand for commodities and goods, are fueling aselloff of emerging-market stocks, reversing a flow of money intothe region in favor of nascent recoveries in the U.S. and Europe.Emerging markets from Brazil to Indonesia have raised borrowingcosts in 2013 to try to aid their currencies as the prospect ofreduced U.S. monetary stimulus curbs demand for assets indeveloping nations.

“The eye of the storm is directly above emerging markets now,two years after it hovered over Europe and four years after it hitthe U.S.,” said Stephen Jen, co-founder of hedge fund SLJ MacroPartners LLP in London and former head of foreign-exchange strategyat Morgan Stanley. “This could be serious for Asia.”

Almost $95 billion was poured into exchange-traded funds (ETFs)of American shares this year, while developing-nation ETFs sawwithdrawals of $8.4 billion, according to data compiled byBloomberg. Signs of a stronger U.S. economy may prompt the FederalReserve to begin paring its $85 billion in monthly bond purchasesas soon as next month.

“The pendulum is swinging back in favor of the advancedcountries,” said Shane Oliver, Sydney-based head of investmentstrategy at AMP Capital Investors Ltd., which oversees about $130billion. “It's one of these things that happens once a decade or sowhen you see a turn in relative performance. We've entered atougher, more difficult period” for Asia.

In the past three months the MSCI Asia Pacific Index has fallen7.4 percent, compared with a 0.7 percent decline in the Standard& Poor's 500 Index and a 0.8 percent drop in the Stoxx Europe600 Index up to the close last week.

Yesterday, India's benchmark index dropped 1.6 percent,Indonesia's lost 5.6 percent, while Thailand's fell 3.3percent.

Indian policy makers led by Prime Minister Manmohan Singh arebattling to stem the rupee's plunge, attract capital flows tobridge a record current account deficit, and revive growth. Thecurrency has weakened about 28 percent versus the dollar in thepast two years, reviving memories of the early 1990s crisis, whenthe government received an International Monetary Fund loan asforeign reserves waned.

“It seems now the pain is going to be in the emerging markets,”said Nitin Mathur, an analyst in Mumbai at Espirito SantoInvestment Bank who expects sectors with higher valuations such asconsumer goods to suffer the biggest declines. “The problems inIndia are not temporary blips. The problems are much more serious,which will take a lot of effort to get resolved.”

In Thailand, the economy entered recession last quarter for thefirst time since the global financial crisis. Toyota Motor Corp.said last month industry-wide car sales in Thailand will fall 9.5percent this year. The government cut its 2013 growth forecastyesterday, as exports cooled and local demand weakened, with higherhousehold debt restricting scope for monetary easing.

Thailand's private-sector credit as a share of gross domesticproduct has “increased significantly” in recent years raisingconcern about financial stability, Krystal Tan, an economist atCapital Economics Ltd. in Singapore, said in a Bloomberg Briefcommentary.

Flat to Falling Growth in China

Taiwan last week cut its 2013 growth and exports forecasts andsaid the global outlook for the second half is worse than inMay.

“We are seeing a turning point,” said Freya Beamish, HongKong-based economist with Lombard Street Research, who saysChina's competitiveness has been hurt by labor costs that are30 percent too high. “China's seeing flat to falling growth on ourestimates, so the region's clouds are already here.”

Sentiment is also being subdued by the prospect of a decline inU.S. stimulus, money that often finds its way to export-basedcountries in payment for goods.

Investors will be looking for clues on how quickly the U.S.Federal Reserve will trim its $85 billion in monthly assetpurchases when the Federal Open Market Committee's July meetingminutes are released on Aug. 21.

Flow Reversing

The $3.9 trillion of cash that flowed into emerging markets overthe past four years has started to reverse since Chairman Ben S.Bernanke talked about a tapering in quantitative easing this year.The slowdown in Fed bond buying will probably begin next month,according to 65 percent of economists surveyed by Bloomberg fromAug. 9-13.

The JPMorgan Emerging Markets Currency Index has declined 2.4percent since Bernanke's June 19 tapering comment. The BloombergDollar Index, which monitors the greenback against 10 majorcurrencies, has increased 0.9 percent over the same period.

“The emerging Asia story is crumbling, and dollar is once againthe king,” said Indranil Pan, chief economist at Kotak MahindraBank Ltd. in Mumbai.

India's moves to tighten cash supply, restrict currencyderivatives, and curb gold imports since July have failed to arrestthe rupee's slump to record lows. The deficit widened to anunprecedented 4.8 percent of GDP in the year ended March 31. Thegovernment aims to narrow the gap to 3.7 percent, or $70 billion,this year, Finance Minister Palaniappan Chidambaram said Aug.12.

India's slump is worse than elsewhere in Asia because thecountry has failed to carry out long-overdue structural changes tothe economy, said Pan at Kotak Mahindra Bank.

“In India, we have great policies on paper, but the gap betweenthe what's on paper and the implementation is unduly large,” R.C.Bhargava, chairman of Maruti Suzuki India Ltd., the nation'sbiggest carmaker by volume, said in an interview. “If we justimplement what's already there, we can get back on track in thenext two to three years.”

Richard Jerram, chief economist at Bank of Singapore Ltd., saysthe market declines reflect overly ambitious expectations ratherthan fundamental weakness in the economies.

“There's a good structural story based on the underlyingdomestic demand,” said Jerram, who has analyzed Asian economies fortwo decades. “What you see at the moment is reaction fromexpectations being unrealistically positive maybe 12 months ago, tonow becoming more realistic.”

Momentum Slowing

One bright spot is Japan, which has seen its economy bounce backon Prime Minister Shinzo Abe's fiscal and monetary stimulus. TheTopix stocks index has risen 34 percent this year.

Abe has yet to show that he can sustain the recovery byrestructuring company and labor laws and taming the nation's debt,which topped 1 quadrillion yen ($10 trillion) in June.

“Asia still has potential in the next three years or more, butin the shorter term, momentum for business is slowing down,” saidShuichi Hirukawa, senior fund manager at Mizuho Asset ManagementCo. in Tokyo. “Investors may become more cautious.”

China's economy last quarter extended the longest streak ofexpansion below 8 percent in at least two decades, curbing earningsat companies such as Hong Kong-based Cathay Pacific Airways Ltd.Still, there are signs of improvement. Industrial output rose morethan economists estimated in July, after larger-than-forecastrebounds in exports and imports, and improvement in gauges ofmanufacturing and service industries.

China is making efforts to bolster confidence. Overall liquidityin China is ample, as banks channel more funds to agriculture andsmall businesses in the world's second-largest economy, People'sBank of China Governor Zhou Xiaochuan said on state broadcasterChina Central Television yesterday.

Still Stronger

“Some Asian countries, especially India, have their ownsignificant domestic challenges,” said Jim O'Neill, the formerGoldman Sachs Group Inc. economist who coined the term BRIC in 2001to describe Brazil, Russia, India and China. “But China is slowingprimarily to improve its growth model, and at 7 to 7.5 percentannual growth is still delivering $1 trillion nominal GDP. AndJapan, still Asia's No. 2 economy, is looking better than it hasdone for a very long time.”

The slowdown in economies such as Indonesia and Thailand is partof a “very, very global” weakness, World Bank Chief EconomistKaushik Basu told reporters in New Delhi yesterday.

The U.S. recovery “was so slow that even the slightest pick upis looking like a pick up,” Basu said. “I don't think the Asiansituation is any worse. In fact, if anything, Asia is probablybetter off than the rest of the world.”

That underlying strength may not help markets in the region asmoney continues to flow back to Europe and the U.S. as globalinvestment rebalances, said Oliver at AMP Capital.

“Asia will still be a stronger part of the world than the U.S.or Europe, but compared to people's expectations, Asia is likely tocome in a little bit lower than expected, and Europe and the U.S.are probably set to surprise a little bit on the upside,” hesaid.

Developing Asia will grow 6.9 percent in 2013, the IMF said inJuly, cutting its forecast by 0.3 percentage point. That compareswith a global expansion forecast of 3.1 percent and projectedgrowth of 1.2 percent in advanced economies.

Investors will be scanning data from Chinese factories toMalaysian growth this week for further signs of weakness.

An Aug. 22 flash reading for China on a manufacturing purchasingmanagers' index by HSBC Holdings Plc and Markit Economics isexpected to come in at 48.1 for August, from 47.7 in July,according to the median economist estimate compiled by Bloomberg. Areading below 50 indicates contraction.

Malaysian Data

Malaysia's central bank on Aug. 21 may post data showing 4.7percent economic growth in the second quarter from a year earlier,after rising 4.1 percent in the January-March period, its slowestrate since September 2009, according to the median estimate ofeconomists in a Bloomberg survey.

Pressure to raise interest rates to support currencies would hitconsumers in countries such as in the 10-member Association ofSoutheast Asian Nations, where cheap mortgages and easy credit havefueled housing booms.

“Southeast Asian consumers have taken on much higher debt in thelast few years,” Royal Bank of Scotland Group Plc analyst SanjayMathur wrote in a July 18 report. He said the largest increase wasin Malaysia, where household debt increased by 20 percent of GDPbetween 2008 and 2012.

There's a feeling that “the rest of the world's getting a bitbetter and Asean's had its sort of burst of credit-enhancedgrowth,” said Edward Teather, an economist at UBS AG who coversSoutheast Asian markets from Singapore. “It's raining already.”

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