Already a popular destination for Japanese tourists for many years, Korea is now also becoming a top destination for Chinese travelers. Affluent Chinese buyers are attracted to the island not only for its clear waters and calm weather but also for its proximity to China - a 90 minute plane ride from Beijing. If Korea can restyle itself as a premier travel destination, a strong tourism industry could significantly benefit the Korean economy. Tourism is already a major industry in many other countries and can be another source of growth for Korea in the future.

Matthews Asia portfolio manager Andrew Foster recently returned from Japan, where he met with companies from a variety of industries. As in past trips, many of these companies seemed to be resting on their laurels, even as present growth was flagging. During this most recent visit, however, a subset of companies in different industries seemed to share a realistic outlook, combined with a sense of urgency to improve performance. Each of these companies cited the strength of the yen as a key factor that would allow them to execute overseas acquisitions, especially in the U.S.

The Commonwealth Games, which will be hosted this year in Delhi, offers India a distinctive brand building opportunity. The preparations for the games have surely ramped up Delhi's severely strained infrastructure. The city has made significant progress towards construction of an intra-city train network and an international airport terminal. Preparations have also given employment to hundreds of thousands of construction workers, and will likely prove positive for the country's tourism. As an offshoot, it might also inspire more investment in developing India's sporting talent.

Millions of Indonesia's citizens are using mobile phones to access the internet and stay connected via social networking websites like Facebook. Indeed, with its rising household income, and youthful and large population of 240 million, Indonesia has the potential to be a major market not only for traditional businesses, but also for new businesses such as mobile internet. Companies that can capitalize on such trends by adjusting their business models and offering new services should also present attractive, long-term investment opportunities.

During the second half of 2007, market commentators debated over 'decoupling' - the idea that Asia may somehow be immune to the vicissitudes of the Western economic cycle. Markets are now worried about slowing momentum in the recovery of the developed world. Matthews Asia chief investment officer Robert Horrocks explores decoupling in the current economic environment.

While its economy has mostly recovered from the global economic crisis, Korea may need to do more to develop and sustain new sources of growth. The country's small and medium enterprises still find it hard to increase the scale of their current operations because the larger conglomerates seem to be getting stronger and crowding out the domestic market. The Korean government may need to adopt a softer regulatory touch and further reform its financial sector in order to provide a more conducive environment for newer industries and businesses to prosper.

As a result of rising incomes and infrastructure build-up, tourism-related industries are growing rapidly in China. In recent years, the number of budget hotels (which have room rates of below US$30) has grown at an outstanding pace, now with nearly 4,000 in China, up from about 500 in 2005. Not only are Chinese tourists traveling more within China, they are also taking more international trips. It seems that China is gradually expanding its consumption power outside its own borders - to the delight of its neighbors in the region.

During her recent trip to Korea, Matthews Asia research analyst In-Bok Song met with several companies that have been making consistent preparations for the next leg of growth in their core businesses. Though their success remains to be seen, there were a few commonalities in their approach. The most apparent one is their entry into China. Another is structural reorganization, which aims to generate synergies within related business and to strengthen core competitiveness. These efforts in Korea's underlying economy help define the foundation for the country's sustainable economic growth.

Malaysia will need to proceed further down the path of liberalization in order to ensure that it stays relevant in an ever more competitive environment and truly grow with the Asian continent. Fortunately, over the past few years, policymakers have scaled back parts of the country's affirmative action system and placed emphasis on the expanding the services sector - both of which are long-term positives that could bode well for Malaysia relevance, not just as a tourist destination, but for long-term capital appreciation.

Much effort has gone into trying to understand the elements of 'risk' and 'uncertainty' for investors. Matthews' Chief Investment Officer Robert Horrocks tries to bridge the gap between what academic theories define as risk and the experience of practitioners - particularly when it comes to managing Asian equity portfolios. In an environment in which risk is not clearly or reliably defined, he cautions, be humble.

Inner Mongolia, not to be confused with Mongolia, is a province in northern China recently visited by Matthews Asia research analyst Winnie Phua. Two dairies in the region command 60 percent of China's dairy market. Unlike most other agricultural industries in China, the dairy business underwent consolidation fairly early on. Over the past decade, it has witnessed rapid production growth of more than 20 percent each year thanks to industry consolidation efforts and increasing milk consumption. These efforts provide insight into how other consolidating industries in China may fare.

On paper, Indonesia has made big strides, with annual GDP growth of more than 5 percent in the last several years - including in 2008 when most markets suffered. The country's stock market has also been the best-performing market in Asia since late-2008. But if you stand in the middle of Jakarta you somehow don't get that sense. Indeed, there are still challenges to overcome: infrastructure woes, the country?s widespread poverty and a government lacking checks and balances.

During a recent trip, Elizabeth Dong visited Nanjing, Hangzhou and Ningbo, second-tier cities in the Yangtze Delta region to visit factories that make such items as auto parts, optical components, processed foods and apparel. The companies, which collectively employ about 280,000 workers, are bellwethers for China's labor-intensive manufacturing sector. While some factories offer workers pleasant working conditions, many laborers operate in poor environments with noise pollution, toxic fumes and extreme room temperatures.

After experiencing swift growth in 2009, China has become the world's largest auto market in terms of unit sales. With approximately 80 manufacturers now competing for a share of this immense market, China's car industry is also quickly becoming the world's most competitive. The argument for investing in this market is compelling. Not only is penetration so far still low, and thus full of potential, the industry is growing faster than China?s overall GDP. This is not to say, however, that the growth will be in a straight line

Two weeks ago, Matthews Asia portfolio manager Andrew Foster attended the 2010 World Expo underway in Shanghai. The theme of the expo, 'Better City, Better Life,' is intended to demonstrate the benefits of better urban planning, smart growth and a stronger emphasis on the environment. Its message was juxtaposed, however, against the reality that much of the country's growth has been fueled by construction and heavy investment. And while the expo does illustrate China's first steps toward openness, fewer than 2 percent of event participants came from abroad.

It is easy to get carried away with the potential of a full economic revival of rural (and consequently, agricultural sectors) within India. Some of the recent strength can be attributed to new policies by the central government, including guaranteeing employment for 100 days. The early results of these policies are encouraging, but the impetus needs to be sustained in the form of more forward-thinking investment in social infrastructure, including health and education. Nonetheless, it is hard for any long-term strategy focused on India to ignore the potential of these smaller markets.

Some Asian countries have imposed capital controls as a measure to prevent asset bubbles. Policymakers are clearly wary of imposing further controls on capital. However, they cannot prevent the bubbles they fear by using monetary policy alone?until they allow their currencies to appreciate. Otherwise, they are simply allowing international investors to enjoy the high interest rates that tighter policy brings at the existing cheap exchange rate and capital will flow in.

China?s central bank announced over the weekend that it would reform the exchange rate regime for its currency, the renminbi, and allow it more flexibility. While the RMB should rise against the U.S. dollar in the near term, any movement will be small and gradual. The more important long-term impact of China?s RMB reform is the acceleration of structural changes to reduce the country's reliance on exports and grow more reliant on domestic consumption. China?s central bank officials have said that a more flexible currency will 'direct resources to domestic demand-driven sectors.'

Bank loans account for the vast majority of capital raised by China?s non-financial sector. The corporate bond market is still extremely undeveloped?at the end of last year, the size of China?s corporate bond market was about 3.3% of China?s GDP. Banks have been reformed over the last two decades, but still have a way to go. A recent IPO is an important step in that direction.

With little cooling of the property sector in sight, in April the Chinese government stepped in with tougher measures to curb housing prices. So far, these policies seem to be effective as we are seeing drops of more than 50 percent in property sales in major Chinese cities. Developers are preparing for a slow market over the next two to three months as prospective home buyers adopt a wait-and-see attitude on purchases. Over the long run, however, the prospects for China?s property market appear to remain sound.

A combination of rising consumer demand, emerging technology, market forces and gradual regulatory reform is transforming Asia?s media landscape. Research analyst Elizabeth Dong explores the ways in which China?s publishers and local governments are pushing for reform, and India?s traditional media marketplace has been transformed by private entrepreneurs and foreign players.

Yu Zhang reflects upon a recent week spent in China. The general sentiment on the ground is quite positive, underpinned by a sustained pick-up of economic activity carried over from last year, and people are also becoming more confident about their own well-being. As China rebalances its growth model and allows its western regions to catch up to the east coast, cities like Chengdu, which have enjoyed a relatively low-cost advantage, are developing a lead in new, fast-growing industries and have the potential to be the next growth engine of China's economic development.

What both Thailand and Korea have in common is that their underlying political tensions have been ongoing, certainly for long enough to have earned their markets a valuation discount. This is not to say that investors are in any way protected from such political unease - for if the events were to flare up into a serious conflict in either case, more property damage and loss to asset values would occur in both countries. Nevertheless, Thailand and South Korea remain the two cheapest markets in the region in terms of price-to-earnings measures.

Michael Han recently returned from a visit to Korea. The country?s overall consumption and economic activity looked quite solid, based on first quarter GDP growth, despite soaring fruit and vegetable prices due to an unusually cold spring. Given that just 13 percent of Korean exports are destined for the European Union, the overall impact from Europe?s troubles appears limited. Home prices have stabilized or fallen in some areas, but lending in Korea remains cautiously healthy thanks to stringent historical lending standards.

Thanks to improved education levels, Asia now has a bigger pool of quality human resources seeking better employment of their skills. Meanwhile, the cost of this labor in Asia is rising. One area that therefore needs to evolve in Asian economies is business services. Continued productivity growth is one of the most important benefits we can expect from evolving business services. Software and information technology services would arguably have the most direct impact on productivity growth in the industrial, commercial, distribution, technology and health care sectors.

With India?s higher economic growth rates, its social and physical infrastructure is becoming increasingly strained. Even though India has years of catching up to do on infrastructure investment, there have been some early signs that the government is awakening to the problem and starting to take action. One positive response to bureaucratic shortcomings has been the emergence of a new model of public-private partnership that substantially shifts infrastructure-related financial, operational and technical responsibilities to the private sector.

Following a visit to Macau, Ishida is upbeat on the tourism and casino industries there.

In the context of Europe's sovereign debt problems, we do not expect Asia to become a safe haven for investors in the near term. As solvent as China?s sovereign debt position is, questions still remain over the borrowing by local government investment vehicles during the recent stimulus plan and property boom. This is not a benign environment for Asia?s equity markets. But we do take solace in the long term, because these events once again show the relative health of Asia?s economies.

During his recent visit to Hanoi and Ho Chi Minh City, Matthews Asia's Elizabeth Dong had the opportunity to compare some of Vietnam's emerging sectors, as well as some more well-established industries, including its telecommunications industry?one area in which Vietnam has surpassed its neighboring countries. The government has anchored its monetary policy on the depreciation of its currency, the dong. A depreciating currency makes goods cheaper and wages more competitive, which in turn increases foreign direct investment and promotes exports, but also causes high inflation

India?s financial sector watchdogs have demonstrated their independence time and again. For example, the country?s central bank, the Reserve Bank of India, was one of the few central banks that chose to break from prevailing global loose monetary policies. India?s other regulator, the Securities and Exchange Board of India, which is equivalent to the Securities and Exchange Commission in United States, has also come a long way in asserting itself. Formed in 1992, SEBI has been making systemic reforms aimed at better corporate governance, deeper capital markets and more satisfied investors.

The evidence for overinvestment in China seems to be thin - on the contrary, returns on capital have been stable and rising, suggesting that the productivity of the underlying economy remains strong. The government has tools to combat any concerns about overheating - including interest rates, reserve requirements and allowing the currency to appreciate. This commentary also includes a roundtable discussion with the Matthews Asia Funds Investment Team on a possible China bubble.

While most Japanese companies are still cautious over the medium term, the tone is certainly becoming upbeat. Management teams are gaining confidence as the economy recovers, which bodes well for the outlook on capital expenditure and consumption. With their high operating leverage, profits at Japanese manufacturers tend to rebound quickly when sales start to grow. Japan has been the best performer among major global equity markets so far this year, and we hope to see further improvements soon.

Korea avoided serious trouble related to the global economic crisis of 2008, and some senior government officials project GDP growth as high as 5 percent this year. The country's economic progress may be partly due to its import substitution strategy. Under government leadership, Korean firms created industries by copying or reverse engineering products that were first created by more advanced countries decades ago. Korean companies are also leveraging relationships with China and other emerging Asian markets.

India's upper parliamentary house recently passed an historic bill that would reserve one third of its legislative seats for women. Women currently account for one tenth of India's members of parliament. The passing of this contentious bill is an early step in the process of amending the country's constitution. Even though India's constitution is quite progressive when it comes to gender issues, Indian women still face inequality in many areas. Placing more women at the top of the political food chain could be instrumental in furthering equality in other aspects of Indian society.

Most companies in China have seen rapid growth this year relative to 2009. Most banks are more cautious about lending this year, however, and contrary to last year, when the government initiated a massive stimulus program to boost the economy, the challenge for China in 2010 is to maintain economic growth while avoiding overheating. Abundant job opportunities are creating a labor shortage at many factories as inland workers stay closer to home or young people pass up manufacturing for other careers. Rising wages will eventually lead to growing domestic consumption.

Asian entrepreneurs are confident about their long-term prospects. Despite this confidence, however, some countries still need to develop stronger institutional frameworks. Billions of dollars worth of new projects for an industrial zone in the Gulf of Thailand have been halted since an environmental lawsuit was filed two years ago. And failings associated with the 2008 government bailout of Indonesia's PT Bank Century point to institutional weaknesses in that country. Failure to address these institutional issues could cost Asian economies crucial capital from foreign investors.

Investors often compare India and China. Both countries have been liberalizing their economies for quite some time, and feature entrepreneurial private sectors riding the current waves of growth. While China promises higher but arguably more volatile growth, India seems to be on a relatively more moderate and sustainable growth path. Because the typical U.S. investor is probably growth-starved, this tilts the argument in favor of China. Matthews Asia also includes responses from China and India investment specialists who participated in a roundtable this month.

The Reserve Bank of Australia announced February 2 that it would leave its key policy rate unchanged following an announcement by Chinese authorities that they would reduce stimulus to their economy. Analysts expected a rate increase based on domestic conditions. The RBA?s announcement suggests that the countries of the Asia Pacific region are moving tacitly toward harmonized currencies and interest rate cycles, dictated by the business cycles of the largest economies of the region.

'? it is prudent to be cautious about bank lending?not because we fear an unmanageable amount of nonperforming loans for the economy, but because Chinese banks generally made 3-year loans for p