The roof is on fire

New survey data from China confirm what investors in Asia’s stock markets are stubbornly ignoring: Exports and manufacturing are still shrinking. There’s a big disconnect between the news and the newly minted euros and yen which are trickling into Asia in search of bargains. Until exports actually improve, any new grief from Europe, disappointments from the United States, or unexpected policies from Asian central banks could end the party fast.

Asian stocks are being helped up by both expectations and money. The expectations are for a continuation of the improving (though, still hardly strong) data from the US and for rate cuts from Asian central banks to offset weaker growth. The money comes from central banks. The European Central Bank has given euro zone banks half a trillion euros ($662 billion) in long-term refinancing while the Bank of Japan plans to buy an additional 10 trillion yen ($125 billion) of bonds.

Investors who fled Asian markets last autumn have returned. They’ve bought roughly $23.8 billion in regional equities so far this year, more than in all of 2011. Their favourites: Export-dependent markets like South Korea and Taiwan, whose benchmark indexes have climbed 11 per cent and 13 per cent, respectively, so far this year, although they’ve only recovered about two-thirds of the ground they lost in the last four, euro zone-troubled months of 2011.

The result is a combustible cocktail. The latest HSBC PMI data for China show exports orders aren’t improving. And, China’s actual exports dropped 0.5 per cent in January, while Korea’s fell 7 per cent and Japan’s 9.3 per cent. And, profits will be hurt by the cost of debt. The cost of borrowing for Asian companies remains well above where it was six months ago.

Asian central banks may also fail to deliver hoped-for rate cuts. As UBS points out, despite efforts to tighten, real short-term borrowing rates in most emerging markets remain near 2009 lows. Central bankers will recall how, last year, raising rates only attracted more capital from abroad, pushing up currencies and stoking inflation. Cutting rates now will only accomplish the opposite. Asia’s equity bulls may find today’s euphoria fleeting.