The bullet speed at which Asia’s economies are growing is making Asian and other  emerging market assets an increasingly core part of institutional portfolios. But economic growth in the last few quarters ― such as Singapore’s 17.9% first-half year-on-year bounce, with full-year expansion estimated at 13% to 15% ― mask underlying hazards.

Tony Tan, deputy chairman The Government of Singapore Investment Corporation (GIC) is well aware of the risks. Deputy chairman Tony Tan remarks that the post-crisis environment will be riskier than before: “The economic recovery, while real, is fragile and there is a risk that negative shocks could push the global economy towards a recession sooner than expected.”

GIC is mandated to invest outside Singapore and has approximately a quarter of its portfolio, worth several hundred billion dollars, invested in Asia, though this is not a target allocation. Tan says Asia’s economic ascendance has a downside: “Shifting economic power could lead to conflicts among nations. Asia will increasingly face labour, natural resource, and commodity constraints to its high growth strategy.” Rapid growth will also create environmental discord, he adds: “Challenges include land contamination, water scarcity, water and air pollution, destruction of bio-diversity, and climate change. This situation is not sustainable. A richer and more sophisticated citizenry will also demand policies which are environmentally friendlier.”

Moreover, much of Asia’s economic surge was supported by consumption in the West, extraordinary government stimulus spending and other factors that look unsustainable in the longer term. For example, 60% to 70% of Singapore’s exports ultimately end up in the US in one form or another. The city state’s blazing growth in the first half of 2010 was due substantially to public sector construction, augmented worldwide demand for electronic goods and a “surge in output of the biomedical manufacturing cluster”, according to the Ministry of Trade and Industry.

Investments that invigorate Asian economies come primarily from less healthy economies such as the US, Japan and Europe. In Singapore, for example, commitments to investment in manufacturing totaled about S$11.8 billion in 2009. Of that, only S$3.4 billion were from local sources; the US was the largest contributor with S$4.2 billio , followed by Europe with S$2.5 billion and Japan S$1 billion.

Asian economies with a larger domestic demand, however, might over time grow a sizable domestic marketplace to offset the West’s relatively diminished buying power. Tan foresees that “in some countries, especially the larger economies of the BRICs, an expanded middle class will consume more goods and services, such as TVs, computers, and tourism. In many countries, extensive infrastructure investment will help meet the demands of massive urbanisation. Asia’s economic rebalancing will, over time, result in significantly stronger currencies.”

Like his colleagues at Temasek Holdings, Tan thinks that Asia’s financial institutions will gain from all these developments. Unlike their developed-world counterparts, Asian financial institutions have healthier balance sheets, enjoy lower leverage and are better capitalised. “The globalised Western banking system, hampered by capital con traints and re-regulation, will likely not be able to intermediate the massive capital demand needed to finance Asian growth. This leaves the playing field unusually open for Asian financial institutions and markets, particularly for several years.” As Asia stands at the threshold of its next stage of development, Tan foresees “bumps along the way, perhaps a few crises”, but innovation and adaptation will see the region through. While most Asian economies have proved themselves adept at adaptation innovation, which requires an individualistic culture and a high tolerance for non-conformity, may take a while to become Asia’s new normal.