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Asian markets have suddenly run into some strong headwinds. But don’t imagine that this is just fallout from Wall Street’s reaction to the welcome (if belated) effort of the Securities and Exchange Commission to pursue a serious conflict of interests case against top shark Goldman Sachs.

For sure, Asia and emerging markets generally are still basking in the return of developed-market investors’ faith in their valuations as reflecting their bright future, not an unstable past. The Financial Times reports that Western fund managers are planning to double their investment in emerging markets, and India, China and Brazil particularly. But such funds overall don’t have a good track record in timing Asian booms and busts.

For sure, the region’s economic prospects are generally still the best in a dull world, and valuations are mostly not excessive. But Asia must now come face-to-face with several realities that suggest that, at best, markets will mark time for some months and could well induce a major correction.

Even the normally very positive Asian Development Bank noted in its recently published Asian Economic Outlook that not enough has changed since the onset of the crisis to provide a new impetus for growth. To date a combination of Asian government stimulus actions together with the easy monetary policies in the developed world have combined to revive economies and markets from the despond reached in March 2009. But returning to the status quo ante is not much of a platform for continued expansion.

The ADB notes that higher interest rates are needed soon if inflation, now expected to average 4 percent for developing Asia over the next two years, is not to take off. This is already back to close to 2007 levels and without early action is likely to accelerate further. This may seem an obvious statement given that rates are still zero or negative almost everywhere and Asia mostly continues to take its monetary cue from the West rather than respond to local circumstances. There are some exceptions of course — Australia and India in particular, but they already showed the strongest signs of rapidly returning inflation.

China is furthest behind the inflation curve because its stimulus was biggest, its property price rebound strongest, its inflation figures more distorted and its political needs all the more pressing to keep growth increasing in the lead-up to the next party congress. Its belated efforts to rein in credit growth are focused on administrative measures more than interest rates. But the latter must follow sooner or later.

For everyone, the forthcoming return of more normal levels of rates presents a big challenge to asset markets.

That it has not happened sooner is more due to concerns to hold currencies in check and maintain competitiveness not just vis-a-vis the West but against a dollar-pegged China. As even the ADB points out, revaluations are badly needed to redirect growth. The dam opposing devaluations is about to crack. Singapore saw the writing on the wall and moved last week with a surprisingly sudden rise in its dollar, the subject of a closely managed float. China seems sure to follow now that some sort of compromise has apparently been worked out with the United States. The won, ringgit and even the embattled Bangkok currency, the baht, have moved up in sympathy and will rise much further when China finally moves.

Currency moves will eventually benefit these economies — but not the asset markets that have been boosted by capital inflows attracted by under-valuations. (Only Hong Kong seems destined to keep its dollar peg, for now, and will probably see more asset price inflation as even more money flows from the mainland, which will make its high and socially destabilizing wealth gap even bigger.)

The past few months have seen hugely optimistic looking export rises. But comparisons with a year ago are highly misleading. For sure, there has been some pickup in consumer demand in the developed world, but the export gains have been largely caused by restocking, and a particularly sharp rebound in electronics. But from now on, monthly sequential numbers will tell the story — and it is beginning to look not so pretty with signs of a plateau emerging.

Slow-growing markets in Organization for Economic Cooperation and Development countries are still the bedrock of Asian exports and the consumer demand rebound in these countries has probably gone as far as it can for the time being given the need in countries such as the United States, Britain and Italy to sustain increased levels of household savings. Currency declines against Asian units will also cause a shift toward domestic goods and services. The euro and sterling have already weakened a lot and the dollar is set to fall against most of developing Asia when China moves.

China, of course, remains a driver and a hope for the future and some see its March trade deficit as evidence that domestic demand is now the engine of growth and will help pull the rest of Asia. But there must be some question marks over this. China’s import surge has been sudden and almost unprecedented. It looks to have been partly driven by speculative buying of raw materials and massive imports of machinery for the ongoing construction boom. Both will have to cool down. China’s trade surplus is definitely going to decline as exports probably plateau and assuming commodity import prices (notably iron ore and coal) stay at their new high levels. But this will mainly benefit commodity exporters like Australia and Brazil rather than Asian trading partners.

There may even be some doubts about the strength of non-investment demand in China. The huge boom reported in car sales in particular may be fragile. The numbers are sales by manufacturers, not by dealers. Buyer finance for cars as well as property may also become more difficult as credit is tightened.

None of this suggests a return to crisis. But in many ways the rebound from a year ago has been too easy to be lasting. Meanwhile, many Asian countries with the theoretical capacity to increase domestic demand prove unable to do in practice. Malaysia and Thailand, for example, remain far too reliant on government spending to maintain investment levels.

These countries are running huge external surpluses but private investment is weak for reasons that include political concerns and skill shortages. Singapore remains obsessed with building up its state-controlled foreign asset position at the expense of consumption and private investment. Indonesia lacks the organizational ability to spur badly needed infrastructure. And the Philippines public sector lacks both funds and organization while political issues and the short-term horizons of the private sector keep Philippine private capital flowing out.

On the brighter side, India and Vietnam are pushing the limits of growth even at the cost of inflation and currency weakness. As for China, its growth has been of big net benefit to most of its neighbors — but more the developed ones, the machinery suppliers from Japan, Taiwan and South Korea. But China’s future impact remains unclear. Will its import growth be sustained? Will other Asian countries gain from yuan revaluation? Will China’s capital export — particularly for badly needed power, port rail and road projects — be a significant factor in sustaining neighbors’ growth at a time when traditional export markets stagnate?

Until there are clearer answers to China’s direction, and other Asian countries prove better able to achieve domestic demand-led growth, stock markets are going to find the further rises hard to justify in the face of currency, inflation and interest rate obstacles.

Philip Bowring, a former editor of The Far Eastern Economic Review, is a founder and consulting editor of Asia Sentinel.