From depressed investment to bulging foreign exchange reserves, Asia's economies are still deeply marked by the legacy of the financial crisis that engulfed the region a decade ago.

Asia's economic fundamentals are immeasurably stronger than they were then. Given that most countries now have big current account surpluses and competitive currencies, a rerun of the crisis that started when massive capital flight toppled an overvalued Thai baht in July 1997 is improbable to say the least.

Some economists, however, fret that the world economy has swapped one set of treacherous imbalances for another.

Yet, by turning from an importer into a huge net exporter of capital, Asia -- China in particular -- has helped keep global interest rates low and so fuel a long economic boom, demand for financial assets and an unprecedented burst of corporate buyouts.

But what happens if the consumption and borrowing by rich nations that Asia has bankrolled are exposed as excessive -- just as Asia's excesses were laid bare in the 1997/98 meltdown?

Asia has been adding so much to their reserves because of what they learned from the Asian financial crisis, said Paul Mortimer-Lee, global head of market economics at BNP Paribas.

But it can't go on forever because it means other places are taking on too much debt. That poses a threat to global financial stability if there is some big shift in global economic conditions, he said.

Moody's Investors Service agreed that Asia's insurance policy of accumulating reserves had considerably reduced its exposure to the risk of another sudden flight of footloose global capital.

But, in a recent report, the rating agency added a note of caution: Ironically, this new global state where emerging market economies are net providers of capital has created other problems -- including potential asset price bubbles.

Indeed, some market-watchers say that problem can only grow as China's embryonic state investment agency, with perhaps $200 billion of currency reserves to manage, starts buying stocks.

BIG PICTURE

Ten years on, the region is far wealthier and has far fewer poor people. The output of East Asia ex-Japan is now more than $5 trillion, double the dollar value just before the crisis, and the number of people living on less than $2 a day has dropped to 29 percent from 50 percent, according to the World Bank.

Of the crisis-hit countries, South Korea, the Philippines and Malaysia regained their pre-crisis level of per capita income by 1999; Indonesia and Thailand recovered by 2003.

But, as the World Bank also points out, recent economic growth in most of those countries is running around 2 percentage points lower than in the two decades before the crisis.

The culprit is a precipitous drop in investment, which, in Asia excluding Japan, China and India, is still some 10 percentage points of GDP below its pre-crisis peak.

Although Asia needed time to work off the gluts created by frenzied spending in the mid-1990s, economists are surprised that investment has not shown more life. China is a notable exception.

While pre-crisis levels of investment were certainly excessive, the limited recovery is puzzling, David Burton, director of the International Monetary Fund's Asia-Pacific department, admitted in a Singapore speech on June 5.

A decade after the crisis, sluggish investment can no longer be attributed to the need for stricken banks and companies to restructure and pay down debt, Burton said.

Nor is there formal evidence that China is diverting investment away from the rest of Asia, he said.

The World Bank's best guess is that Asian businessmen have long memories of economic instability and currency crises.

Uncertainty as to how courts will interpret the rule of law and how officials will implement regulations is another factor.

For the World Bank, this underscores the need for governments to knuckle down to the politically tricky, time-consuming task of improving corporate governance and the general business climate.

Such efforts are at the core of the agenda for revitalizing growth in the post-crisis middle-income economies, the bank said in its April East Asia and Pacific Update.

ELEPHANT IN THE LIVING ROOM

Rebalancing Asia's economy also calls for stronger exchange rates to direct resources away from exports and trade-related investment towards home-grown demand, once lingering overcapacity in domestic sectors such as construction have been worked off.

Asia learned the hard way in 1997 that rigid dollar pegs come with risks as well as rewards. Currencies move more freely now.

That they are still heavily managed should be no surprise. As the IMF's Burton noted, China's limited exchange rate flexibility makes it difficult for its neighbors -- read export rivals -- to let their own currencies strengthen.

Or, in the words of U.S. Treasury Secretary Henry Paulson, China is the elephant in the living room.

For its part, Beijing is still suspicious of free markets and is desperate to protect export jobs. It would rather add to its world-beating $1.2 trillion pile of currency reserves than let the yuan rise to a market-clearing level.

Until the costs of this policy approach become more serious, we struggle to see China shifting off this track, said Richard Yetsenga, a currency analyst with HSBC in Hong Kong.

Moreover, we struggle to identity what those costs could be at this point, at last from an internal perspective, he said in a June 4 report.

In other words, if Yetsenga's right, the economic and financial imbalances that are the legacy of the Asian crisis will be around for some time yet.

(Additional reporting by Susan Fenton in Hong Kong)

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