OK here's the Andie Xie argument. I don't go along with all of it, but it is interesting:
Why can East Asian countries not appreciate their currencies against the dollar to contain the bubble? The reason is that US consumers determine Asian currency values. The region?s development model involves wedding the OEM or outsourcing model to its surplus labor. This model has no pricing power until the surplus labor has been exhausted ? a distant prospect considering China?s huge pool of surplus labor. If Asian governments allow their currencies to appreciate with the Fed policy cycles, their productive sectors would suffer huge swings in profitability, causing the cost of capital to be too high for rapid economic development.
East Asia is usually in good shape when either the US economy is doing well or the dollar is weak. When both happen at the same time, the region ends up in a serious frenzy. This was the case in 1993 following the yen?s 20% appreciation against the dollar during 1991?93; the Hang Seng Index doubled during that year but had to struggle in 1994.
While the fundamental relationship between the US demand side and the Asian supply side has not changed, the distribution of the Asian supply side has changed. Since the OEM model is based on cheap labor, the economy with the cheapest labor determines where benefits from US demand go. China is the only direct beneficiary of the US demand stimulus and the cheap dollar, as its vast pool of cheap labor quickly sucks in the supply side from the surrounding economies and then some.
China?s economy is, therefore, the most leveraged to the Fed policy, more than the US economy itself. Other Asian economies benefit from Fed policy by exporting to China, mostly capital goods to expand its supply side. The combination of capacity expansion and rising exports creates a super-buoyant Chinese economy. Deflation disappears for the time being. This is why bad companies become profitable at times like this. As investors extrapolate the current profitability into the future, stock prices shoot up. But the current profitability is just a cycle-peak phenomenon, in my view. When either the US economy weakens or the dollar strengthens, I believe stocks will return to where they came from.
Source: Morgan Stanley Global Economic Forum