HONG KONG: When the United States sneezed, did Asia catch pneumonia? That's a reasonable question to ask given that Asian stock markets, with the exception of China, plummeted even more than others in the turmoil unleashed by the global credit crisis sparked by the sub-prime loan debacle in America.

In three days the South Korea and Taiwan stock markets fell by 11 percent, and those in Japan and Singapore by 9 percent. Bounces of 4 to 5 percent on Monday following the U.S. bailout of Wall Street merely seemed to confirm this.

The exception to the slump was China. It was barely touched, even though its market is by far the most expensive, its banks may soon face a housing bust and its export-driven economy would suffer more than most from any U.S. recession. But China's exclusion testifies to the fact that its financial sector is still largely sealed off, even as its integration with the world trading system has become a major factor in the global economy.

Most of the rest of Asia, meanwhile, showed that strong economic fundamentals can be no match for the dynamics of international financial markets, at least for mid-sized economies with open capital markets that are subjected to the pressures coming out of Wall Street and Europe. The Asian crisis of a decade ago was characterized by a contagious mass exodus of foreign capital from deeply indebted countries. Now there has been contagion, but of a different sort. The countries that were in crisis in the 1990s now have huge foreign reserves, current account surpluses and liquid banking systems.

Most of their stock markets had sharp rises in the preceding months, as footloose foreign capital in a world drenched in liquidity spurred strong asset-price growth, driving valuations back up to those in the West. But as the credit crisis spread from Wall Street to Europe, they became a target for massive foreign sales. These were markets, unlike those in opaque asset-backed securities, that were open and active and that were still showing big profits for most investors. In the space of three days, individual investors in Taiwan absorbed no less than $3 billion in net foreign share sales. The story for South Korea, Thailand and the others is much the same, with locals being able to step up and buy, providing cash for over-leveraged foreign funds facing withdrawals from clients and the freezing of credit markets. Even when markets recovered on Monday foreigners remained net sellers.

That their stock and currency markets were able to absorb such an exodus was in fact a tribute to their underlying strength, and a reflection of the scale of the vendors' debt problems. Yet the market declines in Asia have been widely attributed to inherent local weakness rather than to the critical condition of so many Western funds. When the dust settles all markets will be lower, but the indebted countries will, rightly, be the long-term losers.

The need for foreign cash is not, of course, the only reason for the decline in Asian markets. Some of the weaker economies, like the Philippines, still have dubious fundamentals. Shares in the financial sector everywhere were hit by concerns that banks in Asia, like those in Europe, would have been caught holding billions in poor-quality packaged debt.

For the longer term, there is great concern that the combination of a recession in America and the appreciation of Asian currency needed to rebalance global trade will drastically slow Asian growth and profits. Indeed, the steep falls in the Japanese market were largely due to the impact, via computer driven stock sales, of the yen's rise by 6 percent, 8 percent and 12 percent in three days against dollar, euro and Australian dollar respectively. This will savage exporters' profits.

Generally, East Asia has yet to find a substitute for export-driven growth. If financial turmoil signals the end of a period of rapid global expansion funded by easy money and U.S. deficits, then there is plenty of reason to sell Asian as well as other stocks.

But countries that start the new era with strong balance sheets, liquid banks and healthy currencies are, relatively speaking, the place to be. East Asia will catch a bad cold while America gets pneumonia.