INTERNATIONAL HERALD TRIBUNE 20 | TUESDAY, DECEMBER 22, 2009 . Inside Asia ANDREW MARSHALL SINGAPORE Investors who kept faith in Asia as the world teetered on the brink of financial meltdown a year ago have been richly rewarded — the re- gion’s markets rode out the storm in spectacular style and posted stunning gains. The economic outlook for 2010 ap- pears far sunnier. But with frothy mar- kets betting on a smooth return to busi- ness as usual, the danger of a sudden correction hangs over Asia, unless the region can steer its way past some treacherous political risks. The two most important issues for the world economy in the coming year are political: the pivotal relationship between the United States and China, and the timing and coordination of exit strategies from the stimulus measures that kept disaster at bay. Investors in Asia also need to be wary of political shocks that could sud- denly overturn the region’s risk profile. Upheaval in North Korea, where there are persistent doubts about the health of the country’s leader, Kim Jong-il, and where the economy is go- ing from bad to worse, could cause pro- found regional instability. And the risk of a confrontation between nuclear- armed India and Pakistan, perhaps sparked by another militant atrocity in India, is ticking upward again. ‘‘A multitude of political, security and operational risks converge in Asia,’’ said Michael Denison, research direc- tor at Control Risks, a consulting firm based in London. ‘‘The causes of the global recession are now well under- stood. The contours of the recovery, by contrast, are far from clear.’’ The United States and China are already by far the two most important countries in terms of political clout. Next year, China is set to overtake Ja- pan as the second-largest economy after the United States. The G-2 relationship between the in Japan; India and South Korea could be next. As in any year, the best-laid plans in 2010 could be derailed by unexpected shocks. We have no idea about some of the lightning bolts that will hit Asia — the surprises that the author and fund manager Nassim Nicholas Taleb calls ‘‘black swans’’ and Donald H. Rums- feld, the former U.S. defense secretary, called ‘‘unknown unknowns.’’ But there are plenty of known un- knowns to worry about. Mass social unrest due to economic hardship was the dog that failed to bark in 2009. That could change in 2010. ‘‘A structural rise in unemployment will represent a key macro, political and security risk in 2010, even in states like China where growth has remained relatively solid,’’ said Mr. Denison of Control Risks. The decisive victory of the Congress Party in India’s elections this year was another good-news story for markets that could be threatened if militants based in Pakistan provoked a confron- tation again. ‘‘Another major attack would all but force India’s government to take a much more hostile approach to Pakistan,’’ said Ian Bremmer, president of the political risk consulting firm Eurasia Group, ‘‘al- lowing Pakistan’s military leadership to set aside attacks on local militants and turn their attention to an enemy they feel less reluctant to antagonize.’’ And finally, two key Asian heads of state are ailing, with the question of who and what will come after them far from settled. The 82-year-old King Bhu- mibol Adulyadej of Thailand has been in the hospital since September, anoth- er complication in the long-running political crisis that has riven the coun- try. Many analysts expect instability to get even worse after his reign ends, giv- ing Thai markets another rough ride. But most say there is little risk of conta- gion in other markets. By contrast, when the North Korean leader, Mr. Kim, dies, the tremors will be felt in South Korea, Japan and be- yond. Many analysts say his death would herald the collapse of the regime in Pyongyang, leading possibly to pro- longed civil war in North Korea, ag- gressive moves against the South or the sudden reunification of the Korean Peninsula. In all of those cases, the likely market reaction would be the same: panic. Alan Wheatley will return in January. United States and China is key to shap- ing destiny not just in the coming year or coming decade, but through the 21st century. Like most relationships, it is not easy. Pressure on China to allow the renmin- bi to appreciate will become ever more intense as economic storm clouds evap- orate. But Beijing will not want to jeopard- ize economic growth by letting the cur- rency rise too quickly, and it does not like being told what to do by Washing- ton or anyone else. In the United States, meanwhile, renminbi weakness is re- garded as a protectionist policy that threatens the U.S. recovery. Into this volatile mix add the ever- present threat of import restrictions, like the U.S. imposition of tariffs on Chinese tires in September, sparking a tit-for-tat trade war. Plus, there is the danger that Beijing’s backing of regimes that Wash- ington finds unpalatable, from Pyong- yang to Yangon to Tehran and Khar- toum, explodes into a political confron- tation. Most analysts say Washington and Beijing are painfully aware of the risks and would step back from the brink be- fore any dispute threatened the global economy. But the two countries have yet to find a way to communicate com- fortably as partners. The risk of a misun- derstanding or sud- den chill in relations is real. The second key political risk for Asia — and indeed the world — is dealing with the hangover from the stimulus measures that helped keep the global economy afloat over the past two years. If governments withdraw the stimu- lus too soon, they jeopardize growth. But if they keep policy too loose for too long, they risk not just inflation but also catastrophic asset price bubbles. Given China’s importance to the global recov- ery, signs of property and equity bubbles there are a particular concern. Another risk for investors is that countries trying to prevent bubbles and curb inflows of ‘‘hot money’’ tighten capital controls. Analysts say this could be a key issue for India and Indonesia in 2010. Disagreements could also erupt with- in countries, between governments fo- cused on safeguarding growth and cen- tral banks fearful of inflation and bubbles. That could lead to bad de- cisions and make policy hard to fore- cast. Policy friction is already an issue REUTERS BREAKINGVIEWS Nestlé should keep its pockets lined A Yelp deal could bring heartburn for Google deal. The gum business would fit with Nestlé’s new emphasis on health and ‘‘wellness,’’ but not at any price. There are other logical targets. A deal with the Swiss chocolate maker Lindt & Spruengli would have syner- gies. But its likely price tag of more than 7 billion francs far exceeds the 2 billion to 3 billion francs that Nestlé has consistently said is its ceiling for any in- dividual acquisition. The same goes for the baby-food maker Meads Johnson, being spun off by Bristol-Myers Squibb. Nestlé can afford smaller, bolt-on ac- quisitions in nutrition and emerging markets — two areas it has identified as needing expansion — as well as en- hanced dividends and share repur- chases. True, the proceeds from the Alcon stake would give Nestlé scope for far more grandiose purchases. But Nestlé must tread carefully. The time for bar- gains has passed, and a big deal would mark a strategic U-turn that would hit Nestlé’s credibility and probably there- fore its rating. Nestlé should stick to what it does best: generating cash and passing it to investors. ALEXANDER SMITH Nestlé is in a rare position for a major corporation: It is handing cash back to shareholders. The world’s biggest food group may land itself a further $28 billion next month by selling its stake in Alcon, an eye care company. With so much money sloshing around, the temptation will be to go on a buying spree. But Nestlé should avoid big deals and focus on funneling cash to shareholders. At the end of June, Nestlé had almost doubled operating cash flow to 6.4 bil- lion Swiss francs, or $6.1 billion, while net debt fell sharply. Rather than try to snap up busi- nesses on the cheap, the company re- warded investors by returning about 6.5 billion francs in dividends and share buybacks during the first half. Nestlé increased its buyback program this year, hitting a target of 25 billion francs early without damaging its credit rat- ing. This conservatism looks wise. Kraft Foods’ interest in Cadbury shows that Nestlé has missed the chance to pick up the British confectioner’s chewing gum unit on the cheap in an uncontested gestion. A $500 million deal would come in at more than 15 times 2009 sales. Moreover, Yelp relies on users to write reviews. About a third of all reviews were five stars, or the highest possible. Only 7 percent were one star. It could be that writing negative posts makes people uncomfortable. Or perhaps business people simply write good reviews for their own establish- ments. Either way, the distribution of results looks too skewed. Google, of course, has plenty of expe- rience with people trying to game its system of search. But schemes are easi- er to find in large sets of data because their distorted wakes are more visible. It’s harder to figure out if the one glow- ing review of a corner pizza shop is real or a plant. Google’s search dominance comes from users’ trust that they are being served accurate, mathematically sound, results. The success of local search will depend on making sure what’s found is believable. ROBERT CYRAN Google is dipping its hands further into the messy business of local search. The tech giant may splash out more than a half-billion dollars for Yelp, a Web site of local business reviews submitted by cus- tomers. Google’s mobile ambitions make this a natural pairing. Yet Yelp’s untidy human element may fit awkwardly with Google’s clean algorithmic bent. The biggest growth opportunities in search are local and mobile. The in- creasing prevalence of smartphones, and the increase in iPhone data traffic in particular, shows that people want to find things while on the go. It’s a rich seam for marketers, too. If Google can capture this localized search traffic, ad- vertising revenue should follow. Yelp fits the bill in several ways. Its customer reviews are another valuable set of data that Google can serve up with its other data and applications to users in potentially new and useful ways. It would, for example, encourage small ad- vertisers to go to Google rather than di- rectories or local papers for their adver- tising. And, of course, a deal prevents its rival Facebook from getting a leg up. Yet swallowing Yelp could cause indi- business WITH CHINESE BANKS FEELING PRESSURE TO RAISE CAPITAL PAGE 14 | BUSINESS FRONT Passing crisis may give way to new ones ONLINE: INSIDE ASIA Read past columns by Alan Wheatley. global.nytimes.com/business For more independent commentary and analysis, visit www.breakingviews.com ‘‘A multitude of political, security and operational risks con- verge in Asia.’’ STOCK INDEXES CURRENCIES COMMODITIES 2008 2009 +20% 0 –20 2008 2009 +10% +5 0 –5 –10 2008 2009 +75% +50 +25 0 UNITED STATES S&P 500 52-week 1,102.47 +6.39 +26.5% OIL Nymex light sw. crude 52-week $73.36 a barrel +0.71 +85.7% EUROPE DJ Stoxx 50 2,886.94 +15.72 +20.4 GOLD New York $1,114.40 a tr. oz. +8.60 +31.4 JAPAN Nikkei 225 10,183.47 +41.42 +16.7 CORN Chicago $3.98 a bushel –0.02 +4.4 EURO 52-week €1= $1.43 –0.001 +2.8% YEN ¥100= $1.11 –0.001 –0.3 POUND £1= $1.61 –0.002 +8.6 Data as of 1115 U.T.C. Source: Reuters Graphs: Custom Flow Solutions