Although economic conditions remained good in the Pacific region this month, markets continued to be weak, with the MSCI AC Pacific Index declining 3.1% in June and another 2% in the first two weeks of July. The principal reason for weakness was the behavior of China’s markets, which declined 32% from mid June before recovering somewhat. Chinese figures released this week showed solid 7% growth in the second quarter and suggest that the Chinese authorities’ attempts to prop up the market will succeed, in which case I would expect to see the Pacific region in general recover.

I disagree, though, with the doom-laden consensus about the Chinese market; indeed, I said so in a Pacific Digest column just before the worst week of the downdraft, though my timing could have been better. Admittedly, some negative factors come to mind. The Chinese government stopped the rout, intervening vigorously to prop up prices. This is not unheard of in other markets and was especially prevalent in Asian markets during the crisis of 1997 to 1999, when the Hong Kong government bought shares of devalued companies, for example. Still, interventionist governments muddy the process whereby willing buyers and sellers settle on a price.

The other problem is that Chinese companies, especially smaller privately owned companies, often suspend trading in their shares when the going gets rough. At the rout’s peak, more than half the shares in the market—at least 1,400 names—were suspended. By July 14 matters had cleared up slightly, with 400 shares resuming trading as market conditions improved. Nevertheless, with 36% of the shares suspended from trading, market conditions in Shanghai were far from sound.

On balance, however, it cannot be said that Chinese stocks are overvalued. The average price-to-earnings ratio on the Shanghai Stock Exchange is 19.9 times, below the 20.6 times on the Standard and Poor’s 500-stock index. Remember that China’s economy is growing 7% annually (a figure that may be overstated somewhat) compared with barely 2% growth in the United States. The Chinese market is about six times its level of 20 years ago, with nominal GDP 10.2 times higher, so in that light Chinese stocks don’t look especially expensive. If you buy them through the Hong Kong market, as does our Conservative Portfolio holding Guggenheim China Small-Cap ETF (NYSE: HAO), you get a broad spread of Chinese stocks at 12 times earnings.

Slow Growers

On the dark side of the month’s developments, the Bank of Japan lowered its forecast for Japan’s growth for the year to March 2016 from 2% to 1.7%, and revised its inflation forecast down from 0.8% to 0.7%. Indeed, some analysts predict that Japan’s GDP for the second quarter (our second quarter, its first) may even contract again, renewing fears of a future recession.

The yen, however, continues to decline; it dropped 4% against the dollar this year, which has to be good news for Japanese exporters, including our holdings Yaskawa Electric (OTC: YASKY), Nintendo (OTC: NTDOY) and Trend Micro (OTC: TMICY). Certainly Japan’s political position remains solid; Prime Minister Shinzo Abe just pushed a revision of the country’s pacifist constitution through the Diet, which will probably lead to a burst in defense spending—more economically stimulative than roads and bridges, of which Japan has too many.

South Korean economic growth appears modest, at about 3%, with high consumer debt a concern, as it has been for several years. The outbreak of Middle East respiratory syndrome (MERS) this year was another worry that damaged consumer confidence. The government responded early this month with an $11 billion package of “stimulus” spending—a gesture to Western Keynesianism that would have been better avoided in a country with a projected 2015 budget surplus and safely positive interest rates. Except for its tendency to jail top businessmen—one or more of whom may be let out on August 15 to celebrate the end of World War II and the Japanese occupation—Korea is fundamentally well run, and growth should continue steadily without major hiccups.

I am more worried about the Eastern Pacific: Mexico, Colombia, Peru and Chile.

The continued decline in commodities prices hit these countries hard, and only Colombia showed the political resilience to adjust its policies for a period of slower growth. The reforms Mexico passed in the first two years of Enrique Pena Nieto’s presidency didn’t produce the expected higher growth, and estimates for 2015 were revised downward recently as lower oil prices blew holes in both the earnings of Pemex, Mexico’s state-owned petroleum company, and the national budget. The escape of drug kingpin Joaquin Guzman damaged the Mexican government’s credibility further while increasing foreign investors’ uncertainty. We will remain underweight in this region until signs of true revival emerge.

High Fliers

Elsewhere in the Western Pacific, growth continues at a rapid pace despite the problems in Japan, the United States and Europe. The Philippine National Economic and Development Authority recently conceded that the government’s forecast of 7% to 8% growth in 2015 was a little optimistic, but outside observers peg the country’s growth at 6% or so, a rate that seems likely to be achieved. Meanwhile, for Malaysia, the Asian Development Bank recently reaffirmed its growth targets of 4.6% in 2015 and 5% in 2016, as the government appears to be diversifying its revenue streams away from oil. Overall, the development bank trimmed its growth forecast for Southeast Asia slightly, to 4.6% in 2015 and 5.1% in 2016.

Vietnam, though, had a good couple of months. It recently ranked number one globally for attracting “greenfield investment” from multinational corporations that build factories and other operating facilities in a developing country. According to a Financial Times study, Vietnam attracted 8.14 times the average amount of greenfield foreign investment since 2003 in relation to its GDP. The country’s attractiveness as an investment destination is reflected in its stock market, which continued rising steadily during the recent Greek and Chinese turmoil, benefiting our Aggressive Portfolio holding Market Vectors Vietnam ETF (NYSE: VNM).

Overall, the decline in the Pacific region’s stock prices owes more to the Greek crisis than to anything occurring closer to home, although another crash in the Chinese stock market could cause trouble in countries with economies closely linked to China’s. The argument for investing in diversified Pacific stocks remains strong.