(FORTUNE Magazine) – NOTHING proclaims the success of a bustling economy better than a thriving stock market, and these days the Pacific Rim has more than its share. Powered by a cascade of cash from surging trade surpluses, many Asian markets have shot up 50% or more over the past two years (see chart). Terrific news, right? Not entirely. The stock market boom is in no danger, though shares are getting a tad expensive. But outside Japan, many small, parochial bourses are suddenly being catapulted into the major leagues before they're ready. They face startling increases in trading volume, scary levels of speculation, and hordes of foreign investors pounding at the door. Most will cope, but investors venturing East should know that, except for Tokyo, the integration of Asia's financial markets into the global arena is far from complete. Many are still mired in local traditions, arcane regulations, and rampant corruption. Asian markets tend to run up smartly when money is abundant, and turn down -- sometimes rather sharply -- when funds dry up. Unlike markets in Europe or the U.S., they also operate on volatile political terrain, susceptible to such temblors as China's impending takeover of Hong Kong, foreign wars on Thailand's border, or simmering racial problems in Malaysia. Here is a brief guide to Asia's major financial markets: -- JAPAN. Call it the big enigma. For years Western money managers have forecast the goring of Japan's galloping bull. The average price/earnings multiple hovers around 60, but Japanese stocks just keep on climbing. In Tokyo a dollar invested in 1970 would now be worth more than $20, vs. about $8 in U.S. stocks. Japan's headstrong bull points up some crucial differences between Eastern and Western markets. Like most other Asians, Japanese investors are not nearly so beholden to such Western guideposts as P/E ratios. Japanese investors recognize value, but in less quantifiable ways. If the national economic outlook seems promising, they buy. If not, they sell. Another reason the lofty market P/E isn't as dangerous as it sounds is that Japanese accounting is vastly different. Japanese companies do all they can to lower reported earnings, which is what they are taxed on, while U.S. companies calculate earnings for tax purposes differently from reported earnings. Add in the fact that Japan has much lower interest rates than the U.S., which makes smaller yields more acceptable, and a P/E of 60 starts to look more reasonable. Not cheap, mind you, but reasonable. Japan's financial system is by far the closest Asian equivalent of a sophisticated, Western-style free market. Except for some protected industries, the stock market is open to foreign investors, and several foreign firms own seats on the Tokyo stock exchange. Even so, the government makes its hand felt, mainly through close working relationships between finance officials and big investors. What's the outlook? In recent months investors have had to confront two rises in the official discount rate, the first in nine years. Inflation is not yet a major problem. The strong U.S. dollar, however, requires authorities to jack up interest rates to support the yen. In addition, for the past year Japanese politics have been highly unstable. Many institutional investors are holding off until the dust settles. Says Ron Napier, a market analyst at Salomon Brothers in Tokyo: ''The market should keep climbing, but the pace has definitely slowed.'' After a long run in big-capitalization stocks, many Japanese investors have shifted their focus to smaller companies. From January through October small- cap shares climbed 43%, while large-cap issues went up less than 9%. The other big trend among Japanese investors is toward indexing. That's not astonishing, since Japanese fund managers have badly underperformed the market in recent years. In 1988 they returned about 8% on average, vs. 42% for stocks as a whole. -- TAIWAN. Awash in $75 billion of foreign exchange reserves and limited to just 172 listed stocks, Taiwan's financial market is gushing. Tiny banks with virtually no assets are priced so high that their market capitalizations exceed Citicorp's. ''This market is completely out of whack,'' warns John Nelson of Jardine Fleming in Taipei. Taiwanese law bars foreigners, which may be just as well. In the past year the most powerful force in the stock market has been illegal unregistered investment companies that have attracted billions with the promise of astronomical returns. The funds plowed the money into stocks, driving prices ever higher. In any Western country those fund managers would be quickly curbed, but the Finance Ministry decided not to clamp down on them until after the December 1989 elections for fear of destabilizing the market. -- SOUTH KOREA. Korea's financial markets too remain highly insulated from the rest of the world. That's all supposed to end in 1992, when the government has pledged to swing open the doors to foreign investors and financial firms. Some Westerners are skeptical; the government's last pledge was to open up by 1988. Koreans have never been happy with any foreign presence in their country, and the prospect of liberated financial markets only heightens that anxiety.

Although the price is high, Western investors can still get a piece of the action. Korean convertible bonds trade on the Euromarket, but at more than twice the value of the underlying stocks. Other options: shares of some Korean trusts that trade in Europe or shares of the Korea Fund, a closed-end fund listed on the New York Stock Exchange. Both sell at substantial premiums over net asset value. Says Barton Biggs of Morgan Stanley Asset Management: ''The Koreans have done an excellent job of creating a scarcity value for their stock.'' If the markets do open up in 1992, much of that scarcity premium could disappear, so buy with caution. In the past four years Korea's stock market capitalization has increased more than 20-fold. On average, Korean stocks sell today at roughly 22 times earnings and yield just under 2%. That makes them expensive because the economy faces inflationary pressures for the first time in many years -- and time deposits pay about 10%. -- HONG KONG. Hong Kong has two major groups of investors: the big business families -- descendants of the old taipans -- who sit on enormous blocks of their company stock, and a second group, mostly smaller local investors and foreigners, who account for most of the day-to-day trading. Though the families are not substantial traders, they act as informal market makers. The Hong Kong market is the epitome of freewheeling, laissez-faire capitalism. It imposes no capital gains tax and requires no audit trail of traders' transactions. For the most part, investors can do as they please. It's the closest thing in Asia to a financial cookie jar. But that also presents special risks: The former chairman of the Hong Kong stock exchange was arrested in 1988 for taking bribes to list a company's stock. Such transgressions triggered a rethinking of the rules to make the market more palatable to international investors. Most brokerages have been recapitalized, trading rules have been tightened, and regulations now discourage insider trading in new issues. Disclosure has been improved as well. The larger concern for foreign investors is what happens after the British colony reverts to Chinese rule in 1997. More than a few financial analysts have done hypothetical valuations assuming that Hong Kong's capitalist system ends abruptly in 1997. In that case, they say, the seven years of earning power left for companies justifies a price on the Hang Seng index of only 800 -- a fraction of the recent 2700. On the other hand, if Hong Kong survives and prospers, the current P/E of 9 and dividend yield of 5% make it Asia's cheapest market. -- SINGAPORE/MALAYSIA. Reflecting the fact that 24 years ago Singapore and Malaysia were a single country, these two financial markets are closely interlinked. Fully one-half of the stocks listed in Singapore are of Malaysian companies, though Malaysia has recently taken steps to break the markets apart. Singapore has a fully automated exchange, so big blocks of stock almost always trade there rather than in Malaysia's Kuala Lumpur. Singapore has no foreign exchange controls, a big plus for foreign traders who like to dodge in and out of stocks without a lot of bureaucratic paperwork. Corruption is virtually nonexistent. The bustling financial district should expand as nervous investors in Hong Kong begin looking for a new home. The only barrier to rapid growth is what many financial people see as heavy-handed government regulation. A few years ago a British broker was expelled from the country for giving a client bad advice. That kind of thing could make an investment adviser uneasy. Most experts consider the Singapore market fairly valued, but some call Malaysian stocks a foot-stomping buy. Says Ean Wah Chin, Morgan Stanley's manager of Asian funds: ''I think Malaysia is going to be the stock market for the next year or two. I am extremely bullish.'' The outlook has improved for Malaysia's commodity exports, which include rubber and palm oil. The economy is also only two years out of a recession, so the business cycle is still young. Many Malaysian companies have foreign ownership limits that are now being reached. The closed-end Malaysia Fund, which trades on the New York Stock Exchange, isn't subject to those restrictions. Recently it was selling at only a modest premium over net asset value. -- THAILAND. Thailand is the only major Asian market that has no tax treaty with the U.S., so investors stand to forfeit a chunk of their profits to the local taxman. Also, after you sell a Thai stock it can take up to three months to get your money. The hassle may be worth it: Thai shares have risen 100% in the past two years. The government has imposed foreign ownership limits on most shares. Result: a dual market, where shares reserved for foreigners can trade as much as 60% higher than those restricted to Thais. Don't look to Bangkok brokers for much help. They are forbidden to make earnings forecasts and lack many of the skills required to do in-depth company analysis. ''They're pretty unsophisticated,'' says Richard Chenevix-Trench, director of Baring International Asset Administration in Hong Kong. The prognosis for Thailand's market is guarded. Though the economic prospects remain bright and the P/E of 20 looks reasonable, investors worry that the country's infrastructure is too backward to support continued rapid growth. Further, many eager international investors have overweighted Thailand in their portfolios because they cannot invest directly in Korea or Taiwan. If they cut back, local support for the market might not suffice to keep prices from dropping sharply.

CHART: NOT AVAILABLE CREDIT: SOURCE: MORGAN STANLEY CAPITAL INTERNATIONAL CAPTION: ASIA'S BOOMING STOCK MARKETS