So is it Asian contagion all over again? Next week will see the first anniversary of the attack on the Thai baht. Markets might not be given to reminiscence, but bad news is again crowding the Asian horizon. Disintegration in Indonesia, foreign banks walking away from recapitalisation deals in Korea and mixed messages on monetary discipline from Malaysia; toss in comments by a senior official of the People's Bank of China (PBOC) ruminating on pressure to devalue the yuan and a right royal cocktail of chaos seems to be engulfing us. Investors factored in a great deal of good news over the past three months. Now they are being disappointed, expectations are changing, and fear of a chain reaction taking all Asian markets lower is all too clear. Perception and reality are difficult to separate at times like these. Should the Suharto regime in Indonesia fall, the strategic balance of power in Asia will irrevocably have changed. A spillover to Singapore and Malaysia is inevitable. Yet, in financial terms, the Indonesian stock market - trading US$30 million a day - is an irrelevance. So when US treasury bonds slip on news of murderous riots in Sumatra what is going on? The big fear remains a yuan devaluation, stimulating a collapse in emerging-market currencies. The sight of Southeast Asia stirring in economic and social chaos only delays the day currency falls translate into competitive advantage. Should Indonesia implode, it is not clear why North Asia should fall into the slipstream. Premier Zhu Rongji has protested 'no devaluation' until he is blue in the face. Whether you believe him depends on your view of the mainland's exposure to export competition and Beijing's key policy objectives. That a senior PBOC official would contradict his premier seems unlikely. Whether such logic convinces conspiracy theorists is, of course, another matter. The point is that contagion has become the new Asian investing paradigm: that regional economies suffer a commonality of trouble and will inevitably fall and rise together. You can argue the flawed logic of such a proposition, but comparatively small movements of money are driving markets. Fund managers now see dark clouds where silver linings were spotted just last week. Malaysia has been running a dangerously loose monetary policy for months. Yet only in the renewed climate of fear are comments by the prime minister calling for lower interest rates ascribed great importance. In Korea, the absence of a single major bankruptcy during the past four months meant banks were continuing dangerously to support effectively bankrupted firms. Yet only now is sentiment turning markedly bearish with reports that US banks have walked away from recapitalisation deals. For Hong Kong, the irony is that a yuan devaluation should be a boost. Every emerging market from Brazil to Indonesia would see depreciation pressure, but a super competitive mainland would mean a dramatically improved trade balance for its southern entrepot. The reality is that capital flight would probably place irresistible pressure on the peg. Why? Despite good reasons to the contrary, simply because fund managers and businessmen expect every one else to do the same. There are clearly winners and losers from the Asian crisis. The world may have too many factories making too much stuff, but the demand from European and US consumers is real. Simply assuming that all Asian markets must go the way of Indonesia if the worst unfolds in that country is lazy reasoning. Unfortunately, falling asset markets and depreciating currencies create their own reality. Carving up corporate Asia should mean a boost to Hong Kong's services industry while the mainland's competitive disadvantage remains unproven. Contagion is a simple concept in a world that is increasingly hard to fathom. Yet do not rule out 'sophisticated' investors once again falling for the compelling logic of the Asian continent falling and rising as one.